As a business prepares for growth, succession or a potential exit, aligning key employees with long-term value creation becomes increasingly important. One of the most effective ways to achieve this is through a well-designed management incentive plan (MIP).
Our corporate team were involved in multiple deals in 2024 and 2025, and in roughly a third of those deals, the buyer insisted that a meaningful incentive scheme for senior management was put in place by the sellers prior to completion in order to reward, secure and retain key talent post-deal. It is therefore important for founders to consider these incentive arrangements when embarking on an exit journey as well as to generally incentivise key employees.
Whilst equity-based plans such as employee share option plans (ESOPs) are often the default, they are not the only option, and in some cases, may not be the most optimal. Below, we explore five common incentive structures which can be considered by founders and organisations.
1. Phantom share plans: a flexible alternative to traditional equity
Phantom share plans are the rising star of the incentive world. Phantom plans are virtual equity schemes that simulate the financial benefits of share ownership without transferring actual equity. These plans are typically made available to senior management and participants are awarded “phantom units” which can vest over time or on satisfaction of certain conditions. Such units often mirror the financial upside of shareholding (such as participating in dividends or sharing in exit proceeds) without diluting actual ownership.
Pros
- No dilution of ownership or voting rights
- Flexibility in plan design (e.g. good/bad leaver provisions, performance triggers)
- Flexibility in level of participation (e.g. appreciation only/full value/performance-based/hybrid)
- Lower administrative burden than equity-based plans
- No need to amend constitutional documents or issue new shares
Cons
- Requires careful tax and accounting treatment
- May strain cash flow if not budgeted for
- May not be perceived as “real” equity by participants
Best suited for: Businesses seeking to retain control while offering meaningful economic upside to key employees, particularly in anticipation of a sale or investment.
2. Equity issue: transferring real stake in the business
The classic route, giving employees actual shares in the company as well as full shareholder rights including voting and dividend entitlements. In certain jurisdictions, businesses can explore the issuance of a different class of share for the employee share plan (and design a share class which fits the economic vision), such as non-voting or restricted shares, to align incentives without diluting control. This approach not only fosters a strong sense of ownership but also directly ties management’s financial outcomes to the company’s performance and eventual sale value.
Pros
- Strong alignment between employee and shareholder interests
- Can foster a long-term ownership mindset
- May enhance employee loyalty and engagement
- Can be flexible in plan design (if different share classes are available in the relevant jurisdiction)
Cons
- Dilution of ownership and control
- Increased complexity in governance and shareholder management
- It will be important to consider leaver provisions
- Potential complications during exit or fundraising events
Best suited for: Businesses with a stable shareholder base and a long-term vision for employee ownership.
3. Employee Share Option Plan (ESOP): ownership but with conditions
Equity options are a halfway house between phantom shares and full equity. They give employees the right to acquire shares at a fixed price, typically after meeting certain conditions (such as remaining with the company for a set period of time or hitting performance targets). The shares only become owned by the employees once their right to exercise their option to acquire the shares has been triggered and the option is exercised.
Pros
- No immediate dilution
- Aligns employee incentives with company growth
- Can be structured around exit events or financial targets
- Flexibility in level of participation (e.g. appreciation only/full value)
- Flexibility in plan design (e.g. good/bad leaver provisions, performance triggers)
Cons
- Requires legal and tax input
- Participants may not realise value until a liquidity event
- Administrative complexity (design, option pool management, on-going management)
Best suited for: Growth-stage businesses looking to reward future performance while wishing to defer equity transfer.
4. Profit share plans: linking shared success with rewards
When the company wins, everyone wins, and this is the spirit behind profit-sharing plans. Profit-sharing plans provide employees with a share of company or divisional profits, typically through annual cash payments linked to company and/or individual performance. These plans are structured through profit share contractual arrangements which can sit alongside employment contracts.
Pros
- Simple to implement and communicate
- No equity dilution
- Directly tied to business performance
- Flexibility in plan design (ability to link to certain divisions or groups within the business)
Cons
- Limited long-term retention impact
- No capital upside for employees
- May not align with broader strategic goals
Best suited for: Growth-stage businesses looking to reward future performance while wishing to defer equity transfer.
5. Cash bonus schemes: the classic motivator
Most businesses operate some sort of cash bonus incentive scheme, and they often work well. Sometimes, “if it ain’t broke, don’t fix it”. Cash bonuses, whether annual, quarterly, or ad hoc, remain a staple of incentive strategies. These are often linked to individual or team performance, are paid out periodically and used as part of broader variable compensation frameworks. These plans are structured through contractual arrangements which usually sit within or alongside employment contracts.
Pros
- Immediate and tangible reward for performance
- Easy to administer
- No impact on ownership or governance
Cons
- Short-term focus
- May become expected rather than performance-driven
- No alignment with long-term company value
Best suited for: Supplementing other incentive structures or rewarding short-term achievements.
Picking the plan that fits
There is no one-size-fits-all solution. The right incentive plan will depend on the company’s objectives, ownership structure, growth trajectory and the profile of its key employees. When structured right, they offer a win-win: employees share in the success they help create and the company retains its key talent whilst being future-ready.
At Gateley Middle East, we work closely with founders, management teams and investors to design and implement tailored incentive structures that strike the right balance between motivating key talent and protecting shareholder interests.