Incentive programs / Incitamentsprogram
"What happens to my incentive program if I quit?"
Do you have a long-term incentive program offered to you by your employer, or are you an employer considering to offer your employees a long-term incentive program? If so, have you considered what happens - or reasonably should happen - if you/your employees don´t work for the whole vesting period?
First, let’s in a condensed manner address what we mean when talking about a long-term incentive program.
An incentive program is a remuneration model that will award your employees performance-related pay-outs, typically based on the overall value growth of the company (or a unit thereof) and/or other metrics relating to economic developments. The remuneration will either come in the form of equity instruments such as shares or options, or it will come in cash, or in a mix of the aforementioned.
Vesting. Most typically the program will run for a period of 3-5 years. The basic idea is that the stipulated time frame should create the right incentive for key personnel to work hard and smart for the overall long-term value growth of the company, and hence to create more value for the company´s shareholders.
Therefore, a fundamental requisite for you to get such remuneration will be that you stay on as an employee (or board member or consultant) during the whole program - i.e. you must stay on and pull your weight for a so called vesting period (that is the "earn-in-period").
However, as life happens reasons can develop that make staying on for the whole period unattractive or even impossible. Therefore it is important to ensure fair and balanced terms in relation to an early employee departure. Make sure you fully understand what happens for instance if you decide to quit your job or get laid off prior to completing the full vesting period.
Linear vesting. While vesting can take place on an all-or-nothing basis (more on this below), most typically the vesting period will be linear, which means that you get to keep a portion of the instruments if you have “earned them” by remaining employed by the company during some qualifying part of the vesting period.
This would mean that if you e.g. are let go prior to full vesting of a 5 year program, the linear design means that if stay for 1 year you get to keep 20% of the instruments, 2 years equals 40% and so on. (There are also many creative versions of the linear vesting structure.)
Cliff vesting. As a variation on linear vesting, cliff vesting will mean that there is an initial hurdle that you must complete before you are eligible for any portion of the remuneration. Once you have reached the hurdle, the calculation will most typically be linear – also retroactively.
If you for instance participate in a 5 year incentive program with a cliff of 2 years, this will mean that if you stay for 1 year you will not get to keep anything, but if you stay on for 2 years you get two-fifths (or 40%) of the instruments.
Practical treatment. If you have already been awarded instruments this will be regulated with an obligation to sell them back at e.g. nominal value or the price you bought them for, and if you have not been awarded any instruments then the amount you are awarded will be discounted depending on how much you have vested before leaving your position.
Leaver provisions. Importantly, what you get to keep (if anything) if you do not stay on for the whole vesting period will furthermore (most typically) depend on what type of leaver you are considered to be. There are as a rule two types. You can be considered a “bad leaver” or a “good leaver”.
Bad leaver. This is the scary one. Many programs state that if you decide to leave the company for another job (and become a “leaver”) this is seen as leaving on unfriendly terms. You will accordingly risk losing all of your incentive shares/equity – sometimes even including the part that has already vested.
What makes you/the employee to be seen as a bad leaver will be defined by the contract that the company offering you the program sets out and in the negotiations with you. It is therefore key to look at, and make sure you understand, what leaver provisions any incentive program you enter into have. If you quit your employment and join a competitor, that is almost always seen as a bad leaver event.
Good leaver. This is often negatively defined as being when you leave the company without being a bad leaver. Typically this includes you leaving due to retirement, illness etc. (and sometimes also non-competitive departures). Good leavers often get to keep their shares/instruments as far as they are already vested. However this can sometimes be combined with a requirement to sell them back to the company/other shareholders for their full market value.
The conclusion is that any long-term incentive program must be understood in relation to what happens in different scenarios where you leave prior to being fully-vested, and if you are thinking of moving on, or notice that the company is down-sizing – make sure to have the vesting terms and conditions in mind so you can mitigate any negative financial consequences as much as possible. And in almost all cases where you can avoid being a bad leaver, it makes sense to avoid it (also remember that requesting a mitigating sign-on bonus from your new employeer could be a way to balance out the loss in remuneration you otherwise envision).
Stockholm, 2023-07-06
Author: Katarina Strandberg
First, let’s in a condensed manner address what we mean when talking about a long-term incentive program.
An incentive program is a remuneration model that will award your employees performance-related pay-outs, typically based on the overall value growth of the company (or a unit thereof) and/or other metrics relating to economic developments. The remuneration will either come in the form of equity instruments such as shares or options, or it will come in cash, or in a mix of the aforementioned.
Vesting. Most typically the program will run for a period of 3-5 years. The basic idea is that the stipulated time frame should create the right incentive for key personnel to work hard and smart for the overall long-term value growth of the company, and hence to create more value for the company´s shareholders.
Therefore, a fundamental requisite for you to get such remuneration will be that you stay on as an employee (or board member or consultant) during the whole program - i.e. you must stay on and pull your weight for a so called vesting period (that is the "earn-in-period").
However, as life happens reasons can develop that make staying on for the whole period unattractive or even impossible. Therefore it is important to ensure fair and balanced terms in relation to an early employee departure. Make sure you fully understand what happens for instance if you decide to quit your job or get laid off prior to completing the full vesting period.
Linear vesting. While vesting can take place on an all-or-nothing basis (more on this below), most typically the vesting period will be linear, which means that you get to keep a portion of the instruments if you have “earned them” by remaining employed by the company during some qualifying part of the vesting period.
This would mean that if you e.g. are let go prior to full vesting of a 5 year program, the linear design means that if stay for 1 year you get to keep 20% of the instruments, 2 years equals 40% and so on. (There are also many creative versions of the linear vesting structure.)
Cliff vesting. As a variation on linear vesting, cliff vesting will mean that there is an initial hurdle that you must complete before you are eligible for any portion of the remuneration. Once you have reached the hurdle, the calculation will most typically be linear – also retroactively.
If you for instance participate in a 5 year incentive program with a cliff of 2 years, this will mean that if you stay for 1 year you will not get to keep anything, but if you stay on for 2 years you get two-fifths (or 40%) of the instruments.
Practical treatment. If you have already been awarded instruments this will be regulated with an obligation to sell them back at e.g. nominal value or the price you bought them for, and if you have not been awarded any instruments then the amount you are awarded will be discounted depending on how much you have vested before leaving your position.
Leaver provisions. Importantly, what you get to keep (if anything) if you do not stay on for the whole vesting period will furthermore (most typically) depend on what type of leaver you are considered to be. There are as a rule two types. You can be considered a “bad leaver” or a “good leaver”.
Bad leaver. This is the scary one. Many programs state that if you decide to leave the company for another job (and become a “leaver”) this is seen as leaving on unfriendly terms. You will accordingly risk losing all of your incentive shares/equity – sometimes even including the part that has already vested.
What makes you/the employee to be seen as a bad leaver will be defined by the contract that the company offering you the program sets out and in the negotiations with you. It is therefore key to look at, and make sure you understand, what leaver provisions any incentive program you enter into have. If you quit your employment and join a competitor, that is almost always seen as a bad leaver event.
Good leaver. This is often negatively defined as being when you leave the company without being a bad leaver. Typically this includes you leaving due to retirement, illness etc. (and sometimes also non-competitive departures). Good leavers often get to keep their shares/instruments as far as they are already vested. However this can sometimes be combined with a requirement to sell them back to the company/other shareholders for their full market value.
The conclusion is that any long-term incentive program must be understood in relation to what happens in different scenarios where you leave prior to being fully-vested, and if you are thinking of moving on, or notice that the company is down-sizing – make sure to have the vesting terms and conditions in mind so you can mitigate any negative financial consequences as much as possible. And in almost all cases where you can avoid being a bad leaver, it makes sense to avoid it (also remember that requesting a mitigating sign-on bonus from your new employeer could be a way to balance out the loss in remuneration you otherwise envision).
Stockholm, 2023-07-06
Author: Katarina Strandberg