LTIPs v MIPs: Is There A Winner?

LTIPs vs. MIPs: Which Incentive Structure Wins in Today’s Market?

In the realm of executive compensation, Long-Term Incentive Plans (LTIPs) and Management Incentive Plans (MIPs) often spark debate. Both are designed to align the interests of executives with those of the company, but they cater to different types of organisations and have distinct characteristics. Given the ongoing and seemingly structural challenge of the de-equitisation of our capital markets - often to private equity suitors - it seems sensible to explore both plans in detail.

LTIPs: The Public Company Standard

LTIPs are commonly used by public companies to incentivise senior executives over the medium to long term. These plans typically involve awarding shares or options that vest over a period of time, encouraging executives to focus on sustainable growth and long-term performance metrics.

Key Features:

• Award Structure: Participants are granted conditional rights to receive shares (or sometimes cash) at a future date.
• Vesting Period: Usually three years, but five-year vesting is becoming more common-especially with an additional two-year post-vesting holding period.
• Performance Conditions: Awards vest based on performance against metrics like Total Shareholder Return (TSR), Earnings Per Share (EPS), or Return on Capital Employed (ROCE).
• Holding Periods: Many LTIPs now include a post-vesting holding requirement where shares cannot be sold for a further 2–3 years, aligning with corporate governance standards.
• Malus and Clawback: Increasingly standard, to give boards recourse if things go wrong after vesting.

Public companies operate in a highly regulated environment with stringent governance standards. These regulations are designed to protect shareholders and ensure transparency and accountability. While this can sometimes make LTIPs seem cumbersome, these measures are crucial for maintaining investor confidence and market integrity.

MIPs: The Private Equity Favourite

On the other hand, MIPs are the preferred choice for private equity-backed companies. These plans are structured to reward management for increasing the company's value over the investment lifecycle, often through equity-linked rewards and exit-focused value delivery.

Key Features:

• Equity-Linked Rewards: Through growth shares, sweet equity, or options.
• Exit-Focused Value Delivery: Participants only see value on a sale (full, partial, or synthetic), IPO, or refinancing event.
• Subordination and Hurdles: Returns are often subject to meeting investor return thresholds through a waterfall structure.
• Real-Money Participation: Senior managers invariably invest actual capital, often funded by way of loans.
• Tailored Performance Metrics: MIPs can be customised to include specific financial or operational targets that align with the company's strategic goals.

In other words, MIPs deliver a clear line of sight to value creation and align very closely with investor outcomes.

Sibling Rivalry: LTIPs vs. MIPs

Think of LTIPs and MIPs as siblings with very different personalities. LTIPs are like the steady, ponderous older sibling. They take their time, follow the rules, and focus on the long game. They’re all about structure and governance, ensuring that every step aligns with corporate standards, shareholder expectations, and management.

On the other hand, MIPs are the zippy younger sibling. They’re relatively agile, quick to adapt, and laser-focused on game-changing strategic results. MIPs thrive in the fast-paced world of private equity, where the goal is to maximise value quickly and efficiently. They’re designed to reward management for hitting specific targets and achieving rapid growth, making them dynamic and highly responsive.

Comparison Table

Key Differences

Flexibility of Design: LTIPs follow established templates and are constrained by shareholder guidelines. MIPs are designed from scratch, tailored to investment outcomes. Advantage: MIPs

Alignment with Exit Objectives: LTIPs vest irrespective of exit; MIPs only deliver value if investors realise a return. Advantage: MIPs for PE environments; LTIPs for retention over time.

Tax Efficiency: MIPs can offer full CGT treatment. LTIPs can benefit from EMI relief. Correct structuring is essential in both cases. Advantage: MIPs (with care).

Complexity and Cost: LTIPs are relatively simple to implement. MIPs require tailored drafting and valuation. Advantage: LTIPs

Perception and Communication: LTIPs are better understood by participants and stakeholders. MIPs can feel opaque unless modelled clearly. Advantage: LTIPs

Quantum and Potential Upside: MIPs offer higher potential payouts linked to business exit. Advantage: MIPs

So, Which is Better?

The answer lies in context.

• LTIPs: Suit listed and steady-growth businesses where equity is traded and public.
• MIPs: Suit private equity-backed companies seeking a high-growth exit.
• SMEs: Can benefit from EMI (a form of LTIP), while founder-led businesses may adopt hybrid plans.

Closing Thoughts: Use the Right Tool for the Job

Neither LTIPs nor MIPs are universally better - they are tools for different stages and strategies. LTIPs are elegant, clean, and efficient, perfect for steady-state value creation. MIPs are complex, powerful, and high-stakes-ideal for growth and event-driven exits.