Aligning ownership and management:

In medium to large family businesses (with revenues between €50 million and €500 million), one of the silent threats to sustained value creation is the misalignment between the interests of the owners and those of the management team. This situation, widely studied under “agency theory,” occurs when managers — who are not necessarily shareholders — make decisions that maximize their personal benefit rather than the overall value of the company.

Among the most common risks are:

  • Lack of a long-term vision: executives may favor strategies that improve short-term results to solidify their position or justify their compensation, even if this compromises the company's future.
  • Tolerance of underperformance: if there is no clear oversight or well-aligned objectives, some executives may adopt a conservative approach, avoiding difficult but necessary decisions.
  • Poor resource allocation: investment or financing decisions may be driven by comfort or internal power considerations rather than profitability or sustainable growth.

This misalignment generates a loss of value, hinders innovation, and can erode the corporate culture. Therefore, implementing mechanisms that tie executive compensation to the value created over the long term is not just a technical option but a strategic necessity.

Prioritizing long-term goals over short-term gains

One of the main challenges in aligning management with ownership is getting the executive team to act as if they were the owners of the company, focusing on long-term value creation.

This alignment does not occur automatically; on the contrary, an agency problem usually exists, meaning a potential conflict of interest between owners and managers. Essentially, the owners want to maximize the company’s long-term value, while the managers (who are not owners) may be tempted to pursue their own personal or short-term objectives. This short-termism can lead to decisions that sacrifice valuable intangible assets (such as reputation, employee loyalty, or the trust of customers and suppliers) in exchange for immediate gain, jeopardizing the future health of the business. A classic example is when investments or quality are cut to improve the current year’s results, thereby eroding the company’s long-term competitive position.

The key to addressing this situation is to design appropriate incentive structures that align the management team’s interests with those of the owners. If executives know that their variable compensation depends on the company’s sustainable success, they will be motivated to think big and long term instead of pursuing only partial short-term objectives.

However, linking compensation to specific metrics requires caution: if objectives that are too narrow or short-term are chosen, there is a risk of creating perverse incentives. This means managers might focus on “winning the bonus” by achieving that one target (for example, increasing sales or achieving a certain level of EBITDA) even if it compromises other important aspects that are not measured (such as long-term profitability or customer satisfaction). To avoid this, it is essential to design compensation systems that encourage a holistic, long-term vision of the business, balancing short-term financial metrics with long-term strategic goals and appropriate control mechanisms.

We will analyze the incentives aimed at aligning management with ownership for the long term – including how to objectively measure value creation – and, secondly, other compensation incentives that can be used to motivate and reward management personnel in general:

Long-term incentives to align management and ownership

It is increasingly common for a portion of top management compensation (board members, the CEO, and key managers) in family businesses to be tied to the company’s value growth. The objective of these plans is clear: to align their interests with those of the company’s shareholders and owners. If executives directly benefit from increases in the company's value, they will make decisions thinking like owners, focusing on sustainable growth, profitability, and long-term business valuation.

However, designing long-term incentives in a family business (especially one that is not publicly traded) requires first asking the following questions:

  • Do the owners want to share the company's value (or any increase in value) with the management team? If the owning family is not willing to let executives participate in value gains, incentives directly based on the company’s equity valuation must be ruled out. In that case, alternative incentives could be used (for example, long-term cash bonuses).
  • Is a liquidity event foreseen for the owners in the medium term? Many long-term incentives in unlisted companies only materialize when a “liquidity event” occurs, typically a partial or total sale of the company (divestment) or an IPO. If the family does not plan to sell a significant stake in the near or medium term, a plan based on share value could lack liquidity for years, and the executive will not properly value it. In general terms, if no partial or full sale is in sight, it is advisable to rule out incentives tied to the company’s equity value and opt for other, more tangible schemes. For example, instead of promising a percentage of a future (uncertain) sale, one can define a multi-year incentive whose target amount is fixed (for example, a percentage of the executive’s base salary for each year of the plan) payable when certain long-term business objectives are met.
  • Do the owners want executives to participate in decision-making as shareholders? Giving an executive actual share ownership implies that they acquire political rights (voting at shareholder meetings, etc.) as a partner. Some families prefer to avoid this situation in order not to dilute their control. If the owners do not want to involve executives in corporate governance as full shareholders, it is preferable to find mechanisms that grant them economic incentives equivalent to share value without transferring actual shares.

Based on these considerations, the main long-term incentive mechanisms for executives in family businesses are:

  • Share Delivery or Equity Participation: This mechanism involves making the executive a shareholder of the company by granting them a portion of equity (either purchased on advantageous terms or directly awarded as part of their compensation). This option gives the executive the rights and obligations inherent to being a partner, including voting rights and dividends. To protect the family, it is common to sign a shareholder agreement where the executive commits, for example, to grant the family a buyback option on their shares if they leave the company, ensuring they do not retain equity when they exit the project. The advantage of this approach is that the executive “thinks and acts like an owner” by literally being part of the equity; furthermore, their incentives are 100% aligned with the company’s value. The downside is that the family business must accept the entry of a new external partner, with a possible loss of control if not managed properly, which is why it is usually used only with key executives and in small percentages.

  • Phantom Share Plans: These are incentives based on the company’s share value, but without giving out real shares. The company grants the executive a number of “virtual units” indexed to the share price. In other words, it is as if the executive owned a percentage of the company’s shares virtually, without becoming a shareholder or acquiring voting rights. At the agreed time, the executive receives in cash the market value of those units. This payment is usually triggered by a liquidity event (e.g., the sale of the company) or after a certain period. The main advantage is that it economically aligns the executive with the increase in the company’s value while avoiding any equity dilution. Additionally, the executive does not have to pay any money at any time (unlike stock options, explained below). The disadvantage is that it requires clearly defining how the company will be valued when the incentive is settled (since it is not publicly traded, a valuation method must be established). It is also crucial to establish conditions such as the executive’s continued presence: typically, they are required to remain with the company until the payment date to be entitled to the payout, thus incentivizing their continued service until the plan’s completion.

  • Stock Options: Stock options are more common in publicly traded companies or startups, but some large family firms have implemented them. Under a stock option plan, the executive is granted the right to purchase in the future a number of the company’s shares at a predetermined price (the exercise price), usually after a minimum period of service and once certain milestones have been reached. If the company grows and its share price exceeds the agreed price, the executive can exercise the option, buy shares at the lower price and obtain shares of greater value, thereby realizing a profit. This scheme only makes the executive a shareholder if they exercise the option. In unlisted family businesses, phantom share plans tend to be preferred, unless there is a clear expectation of an IPO or a corporate transaction that would provide liquidity to the shares.

  • Multi-Year Bonuses and Performance Shares: Another way to align interests over the long term without directly tying incentives to the share price is through multi-year bonuses. The company sets performance objectives over 3–5 years (for example, accumulated EBITDA growth, free cash flow generated over multiple years, international expansion achieved, return on invested capital, or even non-financial metrics like market share or customer satisfaction) and, at the end of the period, rewards the executive with a cash bonus if the objectives have been met. Some plans combine various indicators in a balanced scorecard to reflect overall value creation. There are also so-called performance shares in publicly traded companies, where shares are promised to the executive if certain long-term goals are achieved, similarly aligning the reward with sustainable results. In the context of an unlisted family business, an equivalent would be a promise of a cash payment after several years conditioned on predetermined value metrics. The essence is to commit the team to the future vision: if they grow the company in a healthy way over the next years, they will receive a significant deferred reward, reinforcing their commitment to the strategic vision beyond the current financial period.

  • Co-Investment Plans: These plans allow the executive to invest in the company or in a special purpose vehicle, so that their financial incentives are tied to the business’s performance. For example, an investment vehicle is created where the executive contributes a portion of the capital and the remainder is provided by the company or the family. The returns are shared if certain milestones are achieved.

Methods to measure long-term value creation

A critical aspect when establishing long-term incentives is how to measure success. Aligning with “value creation” may sound abstract; therefore, it is necessary to translate the concept into quantifiable indicators:

  • Company Value (Equity Value): The most direct measurement of value creation is how much the company’s total valuation increases. In publicly traded companies, this is reflected in the share price (and typically the total return to shareholders is used, combining share price appreciation and dividends). In unlisted family businesses, it can be estimated through periodic independent valuations or – more commonly – by waiting for a liquidity event (sale, entry of a new investor, IPO) that reveals the market value. Many executive plans, as we have seen, calculate the incentive as a percentage of the sale price obtained by the family upon transferring their shares, or based on the increase in value relative to an initial valuation. For example: “if the company is sold for more than X million, the executive team will receive X% of the sale price.” This approach aligns the executive perfectly with the owners in the event of a sale, but it must be accompanied by retention conditions (requiring the executive to stay until that point).

  • Long-Term Economic-Financial Indicators: When one does not want – or cannot – tie everything to share valuation, multi-year financial metrics are used. For example, the company’s 5-year business plan may set targets for accumulated EBITDA, sales growth, debt reduction, or return on capital (ROCE). A well-designed incentive might establish stepped payments according to the degree of achievement of these long-term strategic objectives. Some large companies use Economic Value Added (EVA), which measures net profit after the cost of the capital employed. This type of measure ensures that executives are only rewarded if they generate a return above the invested capital, protecting the shareholders’ interests. In medium-sized family businesses, a simplified version could be adopted: for example, a bonus tied to the company generating an additional X million euros of value (using an agreed metric) over a 3–5 year period.

  • Market and Non-Financial Indicators: Value creation is not reflected solely in immediate accounting figures. As mentioned, short-term actions can inflate current profits at the expense of eroding future value (brand, competitive position, human capital, etc.). Therefore, some organizations complement financial metrics with indicators of the company's health: customer satisfaction and retention, level of innovation (e.g., new product launches), and the quality of the human team (such as key personnel turnover or workplace climate), and even ESG objectives (environmental, social, governance). Well-structured long-term bonuses include a balanced combination of KPIs that reflect both the creation of financial value and the maintenance of the business’s strategic strengths for the future. An example could be granting part of the incentive for achieving expansion in a key market or for developing a successful new business line that ensures growth 5–10 years out.

The key is that the chosen method be transparent, traceable, and objective. The executive should not be able to influence the metric or its calculation.

Long-term incentives – whether in the form of shares, phantom shares, or multi-year bonuses – aim to align the interests of the executives with those of the owning family, linking a significant portion of their compensation to the company’s performance and improvement. It is essential to carefully analyze what is intended to be achieved with the plan (the owners’ objectives), what time horizon and liquidity context are in play, and what the profile of the involved executives is.

A poorly designed plan could result in the incentive failing to fulfill its purpose despite the cost incurred by the company. In contrast, a well-calibrated plan will be an investment that engenders loyalty from the management team and drives them to maximize long-term value for the shareholders.

Other incentives to compensate management personnel

Beyond the systems tied to value creation and long-term alignment, many companies continue using traditional variable compensation schemes for their executives. These programs can effectively complement strategic plans if designed with prudence.

One of the most common mechanisms is the annual performance bonus, typically calculated on parameters such as EBITDA, sales, operating margin, or the achievement of certain qualitative objectives. It can represent between 20% and 60% of the base salary. However, it should not be used as the only incentive, as it may encourage decisions oriented exclusively toward the short term.

Finally, there are non-monetary incentives that can also be effective in certain contexts: high-level executive education, internal visibility, personal brand development, or participation in group governing bodies. Although they have no direct economic impact, they strengthen the bond with the organization and contribute to talent retention.

Tax considerations

From a tax perspective, variable compensation is deductible for the company if it is tied to professional performance, stipulated in a contract or specific agreement, and actually paid. The expense must be reasonable and proportionate.

For the executive, most of these incentives are taxed as employment income. There are exceptions, such as certain deferred plans or in-kind compensations (for example, phantom shares), which can benefit from a reduction if structured correctly and meeting specific requirements. However, their design requires case-by-case analysis.

Conclusion about aligning ownership and management

An effective incentive system not only rewards performance but also builds vision and aligns interests. In medium or large family businesses, especially those undergoing professionalization, getting the compensation design right can make the difference between sustainable growth and management anchored in the short term.

Less is more: it is advisable to limit the number of incentives, but ensure that each one is well-designed, has a proper time horizon, is rigorously evaluated, and serves a strategic purpose. This is the key to attracting, motivating, and retaining those who must lead value creation.

Aligning management and ownership is not about “establishing order” for the sake of appearance: it is about protecting the execution of the plan, reducing internal frictions, and avoiding decisions that silently destroy value. When roles, incentives, and the rules of the game are clear, the company gains speed, improves decision-making, and becomes more attractive to investors, financiers, and potential buyers.

At Maraz Corporate Finance, we help companies and shareholders achieve this alignment through day-to-day financial management: through our Corporate Financial Advisory services and Fractional CFO, we implement reporting and KPIs, budgets and cash management, executive committee dashboards, and clear criteria for investing, borrowing, or distributing dividends. The objective is simple: to give the owners visibility and control, to give management the tools to execute, and for the company to make coherent decisions that protect and multiply its value.

Javier de Rojas Roca de Togores

Partner - Maraz Corporate Finance