The only way is down? Designing employee share plans for falling markets

We spend far too much time designing share plans for lift-off and far too little time designing them for turbulence.

That looks especially exposed today. The FTSE 100 had been trading around record levels earlier this year and a broad global equity index hit a fresh high on 26 February 2026. Then the conflict involving Iran escalated, oil and gas prices jumped and risk assets sold off. Travel and other economically sensitive sectors have been hit hard. And economists are now talking about stagflation for the UK economy. At the time of writing, oil is over $100 a barrel for the first time in four years and the gilt market has slumped. In other words, the market has just reminded everyone that valuations do not move in straight lines.

But employee share plans are almost always built as if they do. 

Behavioural economists would call this cognitive ease. When markets rise for long enough, everyone starts to assume the current level is normal, durable and deserved. Boards stop interrogating grant assumptions. Executives stop worrying about downside. Vesting schedules look sensible in an up-cycle and deeply arbitrary in a drawdown.

Then the market turns and the weaknesses in the plan become painfully visible.

Employees cannot hedge their employer exposure. They cannot short the business. They cannot buy downside protection around their own award. Their long position is concentrated, illiquid (in the case of private markets) and usually linked to their employment as well as their wealth. When markets fall, that is when “alignment” stops being a slogan and starts becoming a live design question.

So what does downside resilience actually look like in a share plan?

It is not about insulating management from reality. It is about building structures that cope when reality gets harder.

Diagnose before you reset

Not every falling share price calls for intervention.

Before a board touches the plan, it needs to work out what has actually broken. Is this macro volatility? A sector-wide de-rating? A higher discount-rate environment? A leverage problem? Or genuine management underperformance?

That distinction matters. In a conflict-led selloff, a sharp fall may prove temporary. If the market rebounds quickly, an immediate repricing or replacement grant can look less like sensible calibration and more like a windfall delivered at the trough.

That is particularly important for listed companies. Investor guidance is more flexible than it once was, but it still expects a clear rationale, careful tailoring and proper shareholder engagement where remuneration structures are being recalibrated. The right answer is not “reset early”. It is “diagnose first”.

Reset intelligently where the economics are genuinely broken

That said, some plans do become economically dead.

Underwater options are the obvious example. They can sit on the books for years, generating accounting cost and administrative complexity while delivering no real motivational value.

In private equity and growth-company structures, the issue is often deeper. When valuations fall and debt remains fixed, value migrates upwards into the debt stack. Management equity then sits below a hurdle that has become commercially unrealistic. At that point, the problem is not sentiment; it is capital structure. Brewdog is your poster child for this scenario. Click here.

In those cases, a reset can be entirely justified. But it should be done deliberately: recalibrate the hurdle, rebase the stack, rationalise legacy awards and restore a credible path to value. The objective is not to reward failure. It is to re-establish real economic tension in the incentive.

The worst outcome is usually the half-measure - leaving the original structure in place while trying to compensate for it with ad hoc overlays and one-off top-ups.

A related question is whether the performance metrics themselves still work. Sometimes they don't. A conflict-driven selloff, sector-wide de-rating or rebased capital structure can mean the original targets stop measuring management performance in any sensible way. In that case, boards may need to revisit the metric set as well as the award economics. But this is a sensitive tool. Changing metrics mid-cycle can easily look like moving the goalposts, particularly in listed companies. The case for doing so needs to rest on real distortion, not simple disappointment.

Build ranges, not cliffs

The best plans avoid binary design.

A hard cliff works tolerably well in a rising market. In a volatile market, it amplifies the role of timing luck. Participants can be deeply in the money one quarter and functionally worthless the next, even where underlying management performance has not materially changed.

A better approach could be to create a corridor or band of value creation.

That may mean a floor below which nothing vests, a core participation band in which value accrues meaningfully and a taper or flattening beyond a ceiling to control windfall optics. Private equity has long used hurdles, ratchets and classes of shares to avoid purely binary outcomes. Listed companies cannot replicate those structures exactly, but they can apply the same design principle through wider vesting ranges, averaging mechanisms and a more thoughtful mix of absolute and relative metrics and leaning into Remco discretionary powers.

This matters because an oil-led or geopolitical move is not really management performance. A well-designed corridor helps separate market beta from management alpha.

Bank, earned value, rather than forcing everything through a single valuation date

One of the biggest weaknesses in many PLC LTIPs is that too much turns on one point in time (hence the rise of the hybrid plan).

If the award lives or dies by the share price on a single testing date, the plan is effectively outsourcing reward to market timing. That may be tolerable in a benign market. In a volatile one, it undermines credibility.

A more resilient model is to bank earned value progressively. That can be done through deferred share banks, rolling deferral, multi-year averaging, staged release or other smoothing techniques that recognise performance over time rather than at a single market print.

The design objective is simple: cumulative contribution should matter more than accidental timing.

That does not eliminate risk. It just stops the entire incentive outcome being dictated by whether the market is euphoric or fearful on one date.

We have previously written about how to make waiting credible. Click here.

Use liquidity and synthetic tools carefully

Liquidity matters more in falling markets than many boards admit.

In private or closely held companies, structured buy-backs, EBT-supported settlements or periodic internal liquidity events can act as pressure valves. They allow participants to crystallise part of the value without collapsing the long-term alignment model.

But the tools differ materially between listed and private companies. In listed companies, buy-backs, plan amendments and any trust-supported market activity (click here) sit within a more visible governance and shareholder framework. In private equity and private companies, the issue is more often whether the capital structure, debt burden and shareholder arrangements still leave any credible line of sight for management at all. The design conversation is therefore not the same, even if the market trigger looks similar.

Where real equity is impractical, synthetic arrangements can also have a role. Phantom units, SAR-style arrangements or NAV-linked cash plans may preserve line-of-sight and avoid some of the corporate-law and dilution issues that come with issuing shares.

But these should be used with clear eyes. In UK tax terms, all of the above are generally cash bonus arrangements taxed as employment income when the benefit is enjoyed. They may replicate the economics of equity, but they are not a tax-equivalent substitute for real shares. Their attraction is flexibility, not magic. We have written about this before but in the context of infrastructure MIPs. Click here.

Good employee communication matters here as well. In a falling market, silence creates its own risks. Participants need to understand what has happened to the value of their awards, whether the board intends to intervene and what the plan is still designed to reward. Even a well-structured incentive can lose most of its retention and alignment value if employees are left to fill the gaps themselves.

The real test of a share plan

The real test of a share plan is not how impressive it looks in a bull market. It is whether it still feels fair, stretching and worth believing in when markets fall.

That is the issue current conditions have exposed. Plans built on the assumption of a straight-line ascent will start to fracture. Plans built with some tolerance for volatility will hold together.

Because when the market turns, employees find out whether their equity is genuinely an investment proposition or simply an optimistic narrative.

The best incentive structures are not the ones that promise perpetual upside. They are the ones that remain commercially coherent when the cycle turns against them.

At Burges Salmon, we advise on the design, implementation and recalibration of share plans across listed companies, private companies and private equity-backed structures. That includes the difficult cases: underwater options, broken hurdles, outdated metrics, governance-sensitive resets and the tax and legal implications of moving from one incentive model to another.