Incentives
There are a number of obvious reasons for awarding incentives to management. The question often arises whether these should include shares or share options.
From a traditional governance perspective, - the model where owners and the board are different people - share based incentives are intended to be an effective way of aligning the interests of the directors and the owners. The reason why this is important is an assumption that directors will otherwise act in their self-interest and to the detriment of the owners. If the directors are owners or have an opportunity to become owners they will be less likely to act in ways that reduce the value of the business, even if it could enrich them in the short term.
A number of points arise when this model is grafted on to family enterprises. The problem of conflicts of interest does not arise in an owner-managed enterprise. In some family enterprises with non-working owners the assumption is that managers will behave ethically and that trust is more likely to be reciprocated than abused. Such businesses may very well decide that share based incentives are good for other reasons, but enterprising families should be aware of the assumptions on which the conventional model is based and the problems it is trying to manage.
Another problem with share-based incentives for many family enterprises that are privately owned or closely held is that the shares are not traded and cannot easily be sold. These share based incentives are not guaranteed to produce financial value with the ease that would be possible if the shares were publicly traded. This can be addressed by creating an internal share market to provide sufficient liquidity when it is needed.
Some family enterprises prefer cash based incentives that can, if desired, be linked to the increase value of the business and even partially deferred each year in order to give a longer-term incentive to management to build sustainable value rather than taking short-term decisions to maximise the value of the current bonus.
