Carrot equity is a British slang term which refers to a financial incentive in the form of company shares, given to managers or key employees of a firm, who reach their financial targets or goals. It serves as a motivator to encourage them to work harder. Moreover, it motivates them to attain sales objectives or any number of financial metrics. For example, earnings per share (EPS), EBIT margins, free cash flows, leverage ratios, etc., depending on the type of firm. In addition, a manager could also receive carrot equity by achieving business milestones.
For better understanding, say you work for a company that will give you stock options or shares. However, this will only happen if you hit a certain financial milestone or goal. Those shares are your carrot equity. Large and small companies can use this incentive. However, this is often done by small companies, or very young companies. This is because they may not have cash on hand to give a bonus, and they especially want employees to feel invested in the company. If we structure carrot equity the right way, it can create powerful incentives for managers to work hard. Also to make wise decisions, balance short-term imperatives with a long-term strategy, and act as responsible corporate citizens.
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