Management teams are the reason many buyouts happen, and the management incentive plan is what keeps them engaged until exit. On cross-border buyouts, it is also one of the easiest places for UK and US expectations to collide.

US-style and UK-style plans are built differently. US sponsors are used to profits interests and option plans. UK management teams usually expect to hold "sweet equity": ordinary shares acquired at market value, so that growth is taxed as capital rather than income. Importing a US template into a UK business without adaptation can leave UK managers with a much higher tax bill.

Valuation drives the tax result. Sweet equity only delivers capital treatment if it is acquired at its unrestricted market value, or the right tax elections are made. In the UK, joint elections under the employment-related securities rules are routine. In the US, Section 83(b) elections play a similar role for restricted stock. Both have deadlines that are easy to miss in the rush to close.

Leaver provisions need to work in both countries. Good leaver and bad leaver definitions, vesting and compulsory transfer mechanics must be enforceable in the relevant employment law framework. Clauses that are standard in one market can be challenged in the other.

Restrictive covenants are not interchangeable. Non-compete enforceability differs sharply between US states, and between the US and the UK. Covenants given as a seller in the sale agreement are often treated more favourably than those given as an employee.

Think about the size of the pot early. Sponsors and management often argue over the percentage of equity in the plan, but the more important questions may be how the pot is allocated across the team, what is held back for future hires and how the plan will be refreshed after a bolt-on acquisition. Agreeing a framework for those decisions avoids repeated negotiations as the business grows.

Watch the ratchet. Performance ratchets that increase management's share at higher returns are common. They need careful valuation and tax analysis, because they can change the value of the instrument at the time it is acquired.

Communicate the plan clearly. Managers who do not understand their plan do not value it. A short, plain-language summary is worth as much as the documents.

A well-designed MIP aligns management with the investor.

A badly designed one becomes a negotiation at exit.

For advice on incentive arrangements in a buyout, contact Sola Adeyemi or Priya Raman in London.