The cost, the payout per employee and the improvement needed to pay for it, worked on one illustrative buyout.
A broad-based employee ownership pool costs investors its share of the equity gain, paid at exit. In an illustrative buyout where equity grows from $300 million to $750 million, a pool of 5 per cent of the gain pays $22.5 million, $15,000 per employee across 1,500 staff, and takes the fund from 2.50x to 2.425x. It pays for itself if it lifts exit EBITDA by $2.37 million, 2.26 per cent.
Worked in full in The ESG Manager in Private Equity by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Broad-based ownership, where every employee and not only management shares in the exit, has moved from an idea to a programme that sponsors put in front of LPs. The ESG or people lead who proposes one will be asked three things by the deal team: what does it cost us, what does each employee actually get, and what has to improve for it to pay back. All three are arithmetic, and the third is the one that decides whether the plan is a value creation lever or a social expense.
| Input | Value |
|---|---|
| Equity invested at entry | 300 |
| Exit equity value before the pool, year 5 | 750 |
| Pool: share of the equity gain | 5.0% |
| Net debt at exit | 300 |
| Exit EV / EBITDA multiple | 10.0x |
| Eligible employees (excluding management plan) | 1,500 |
| Payroll of eligible employees, $ million | 61.5 |
The pool is granted at no cost to employees and vests on exit, so it costs nothing in cash during the hold. It is set as a share of the gain rather than of the total equity, which means employees receive nothing unless investors make money. How the award is taxed depends on the country and the instrument, and is a question for advisers, not for this model.
Equity gain = 750 − 300 = 450
Pool = 5.0% × 450 = $22.5 million, 3.0 per cent of exit equity
Per employee, equal shares = 22.5m / 1,500 = $15,000, 36.6 per cent of the $41,000 average salary
Investor multiple = (750 − 22.5) / 300 = 2.425x, against 2.50x without the plan; IRR 19.4 per cent against 20.1 per cent, a drag of 0.7 points
Excel: =Pool*MAX(0,ExitEq-EntryEq) and =(ExitEq-PoolCost)/EntryEq
The design choice that matters most to employees is the allocation key. Equal shares per head favour lower-paid staff; allocation in proportion to salary gives everyone the same percentage of pay.
| Band | Heads | Salary | Equal per head | % of salary | Pro rata to salary | % of salary |
|---|---|---|---|---|---|---|
| Operations and frontline | 900 | 30,000 | 15,000 | 50.0% | 10,976 | 36.6% |
| Supervisors and specialists | 450 | 50,000 | 15,000 | 30.0% | 18,293 | 36.6% |
| Professional staff | 150 | 80,000 | 15,000 | 18.8% | 29,268 | 36.6% |
For a frontline employee, half a year's pay from an equal split is a sum that changes behaviour; 18.8 per cent for a professional is pleasant but not transformative. If the plan's stated purpose is retention and engagement among the hardest-to-keep roles, the key should follow the purpose, and it should be decided before the numbers are shown to anyone.
The break-even is not simply the pool divided by the multiple, because the pool is a share of the gain: any extra value the plan creates also enlarges the pool. Investors are no worse off when the uplift in exit equity, after the pool takes its 5 per cent of it, covers the original $22.5 million.
Break-even equity uplift = 22.5 / (1 − 5.0%) = 23.68
Break-even EBITDA uplift = 23.68 / 10.0 = $2.37 million, or 2.26 per cent of the $105.0 million exit EBITDA
Now test one mechanism. Suppose the plan cuts voluntary turnover from 25 to 20 per cent: 75 fewer leavers a year out of 1,500, at a replacement cost of 30 per cent of salary, $12,300 each. That saves $0.92 million a year, worth $9.22 million of exit value at 10.0x, and covers 38.9 per cent of the break-even. Retention alone does not pay for the plan on these figures. Productivity, absence, safety or customer outcomes have to do the rest, which is why the plan needs a baseline for each of those metrics at entry; the method for the turnover figure is in how to calculate employee turnover rate across a portfolio.
| Pool, % of gain | Exit 450 (1.5x) | Exit 750 (2.5x) | Exit 1,050 (3.5x) |
|---|---|---|---|
| 3% | 4.5 / $3,000 / 1.485x | 13.5 / $9,000 / 2.455x | 22.5 / $15,000 / 3.425x |
| 5% | 7.5 / $5,000 / 1.475x | 22.5 / $15,000 / 2.425x | 37.5 / $25,000 / 3.375x |
| 8% | 12.0 / $8,000 / 1.46x | 36.0 / $24,000 / 2.38x | 60.0 / $40,000 / 3.3x |
Because the pool is a share of the gain, its cost to investors scales with success: it is smallest in absolute terms when the deal disappoints. The multiple drag at a 5 per cent pool ranges from 0.025x on a 1.5x deal to 0.125x on a 3.5x deal. For employees the same feature cuts the other way: at a 1.5x exit the equal-share payout falls to $5,000, which is worth telling them at grant rather than at exit.
Quoting the pool as a percentage of equity without saying which equity. Five per cent of total exit equity is $37.5 million, $25,000 a head and a 2.375x investor multiple, two thirds more expensive than 5 per cent of the gain. The second mistake is to present the plan as an ESG cost with a social return only. ESG work has to be priced in the deal team's units: what an ESG value creation plan adds to enterprise value sets out that discipline, and the free companion workbook carries the book's own case from enterprise value to equity and IRR at exit.
A 5 per cent pool on the gain costs $22.5 million at a 2.5x exit, gives each of 1,500 employees $15,000 on an equal split and trims the IRR by 0.7 points. It needs $2.37 million of extra exit EBITDA to pay for itself, and a five-point fall in turnover delivers only 38.9 per cent of that, so baseline the other metrics before the plan is launched.
It depends on the pool and the exit. In the illustrative case a pool of 5 per cent of a $450 million equity gain is $22.5 million, or $15,000 for each of 1,500 employees on an equal split. That is 50.0 per cent of a $30,000 frontline salary. At a weaker 1.5x exit the same pool pays $5,000 a head.
By its share of the gain. A 5 per cent pool takes the illustrative fund from 2.50x to 2.425x and from a 20.1 to a 19.4 per cent IRR, a drag of 0.7 points. The drag is 0.025x on a 1.5x deal and 0.125x on a 3.5x deal, because the pool grows with success.
The pool divided by one minus the pool share, then by the exit multiple. For $22.5 million at 5 per cent and 10.0x, that is a $23.68 million equity uplift and $2.37 million of EBITDA, 2.26 per cent of exit EBITDA. Cutting turnover from 25 to 20 per cent covers only 38.9 per cent of it on illustrative replacement costs.
This article is one calculation from The ESG Manager in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: private equity and private markets → · All 1682 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.