In our practice, the Value Band Plan has become the most popular long-term incentive plan among the business owners anticipating a change in control within the next two to seven years.
Our clients often select Value Band Plans (VBPs) because these plans elegantly balance risk and return across the owners and executives. VBPs provide a scalable incentive: they enable executives to receive an increasing percentage of deal proceeds based on company value at change in control. They are conceptually simple plans. No annual valuations are required. There is no buy-in or tax friction at grant, and the plan units can be dynamically reallocated to the highest performing executives. In short, when properly designed and applied in the right context, VBPs are a highly-effective long-term incentive platform.
Nevertheless, VBPs are not as well known among business owners as they should be. For starters, 54% of all private companies have no long-term plan at all. And many of the remaining companies have traditional equity plans, which can expose owners to unaffordable or inequitable payouts, conflicts between legacy and new talent, excessive tax bills, and other factors that can threaten the ongoing viability of the underlying company