Design a transaction incentive plan

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want key managers focused and retained through a deal.

The quick answer

Set clear value triggers such as enterprise value and cash collected. Define who is eligible and the vesting and payout rules. Tie awards to retention and to post close goals for the first year. Keep terms simple and share examples so managers understand how they win.

The method in eight steps

Set the purpose and pool
Decide what behaviour you want. Retention, clean diligence, and delivery of first year goals. Size a pool as a percent of value or as a fixed amount.
Define eligibility
List roles that shape value and day one stability. State how new hires and leavers are treated.
Choose the triggers
Use enterprise value at close and cash collected within an agreed window. Add a first year goal such as gross margin or net revenue retention.
Write vesting and payout rules
Pay a portion at close when triggers are met. Pay the rest after the cash window and after first year goals are confirmed.
Add retention conditions
Awards require that the person remains in seat through close and through the first year period unless the company chooses otherwise.
Handle special cases
Define what happens on change of role, leave, or termination. Keep rules short and specific.
Model two examples
Show a base case and an upside case with simple numbers so managers can follow the math.
Communicate and track
Give each person a one page letter that states the award, the triggers, the dates, and the example math. Track progress on a private scorecard.

Example

A company set a pool equal to a small percent of value with triggers for cash collected and first year margin. Managers understood the plan and stayed focused through close and through integration.

Pitfalls and fixes

Complex formulas. Keep two or three triggers with plain words.
No link to cash collected. Add a collection trigger so the plan fits liquidity.
Surprise changes at the end. Share rules early and stick to them.

Checklist

Pool size and purpose
Eligibility list
Triggers and payout schedule
Retention rules and special cases
Two worked examples
One page letters and a private scorecard