Aligning Management Incentives in the Blue-collar Sector

August 22, 2024

by an investor from University of Oxford in Hamburg, Germany

I'm currently exploring a potential acquisition in the blue-collar sector, specifically within the roofing industry. I'm evaluating a particular roofing company where the current owner is seeking to retire. The company has a somewhat established management layer, and if I were to acquire it, I wouldn't be looking to manage it directly. Instead, I would appoint one of the existing managers to oversee operations and implement strategic initiatives. My role would involve providing strategic direction, such as implementing streamlined processes and establishing key KPIs to ensure accountability.

I'm seeking advice on how to best align interests in this scenario. What strategies would you recommend to incentivize the manager to run operations efficiently, implement new initiatives, and meet the KPIs, all while ensuring our interests are aligned? Should I consider offering equity (through an earn-in), phantom shares, a revenue/profit-sharing arrangement, or something else? What would typical conditions look like?

Although I'm active in the DACH region, I'm looking for general advice, particularly as it applies to the blue-collar industry.

Thanks in advance!

Reply by an investor
from University of Oxford in Hamburg, Germany

Thanks all for your helpful comments! I totally agree with (1) keeping it simple, especially considering the environment, as the team should be able to calculate how they may benefit, (2) protecting equity, also as my working assumption is that the team values immediate cash payments more than some form of longer-term participation. The production-based pay is also quite interesting. Utilization (hours chargeable to clients) is a key metric in consulting, and our bonuses depend on that to some degree. It's, however, not something roofing companies are considering here. I have to prepare a business plan for the lender on this, and they want to see how I imagine structuring operations. As I'm not taking this on full-time, I will have to present a compelling case that operations will continue properly. Part of my thinking is (1) buying only 80% from the retiring seller for now with a put/call option, (2) putting another 10% in escrow with conditions depending on meeting certain transition objectives, and (3) aligning interest/incentivizing the second-in-command to assume leadership for operations. I would be happy to hear if anyone would like to share some best-practice figures or more concrete examples of incentive structures.

Reply by a searcher
from Maastricht University in Hamburg, Deutschland

I think it really depends who you want to incentivize. If it is the manager/COO/CEO of the blue collar company, then I had previously success with my "own little invention" of "%-share of EBIT-Change yoy". The manager sees real money if the EBIT raises while also the previous base-EBIT is accounted for. Most important it is easy to understand, you can easily explain "If you win this customer, that would increase EBIT by xxx and hence you will have yyy from it", hence it is a quite simple but direct method. Also from my experience implementing a bonus structure for the whole team is often not appreciated by the blue collar team and you will notive no real change in behaviour. However what I had great experience with, is providing "real shares" to the team which makes them feel as co-owners and results in multiple positives aspects (fluctuation, motivation,...). Let me stop here, already quite a long post :)

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