Compensation and Benefits: Essentials of Long-Term Incentive Plans

Abstract

A long-term incentive plan (LTIP) is a plan under which a reward can be earned over a multiyear period, typically if certain conditions are met. The reward is normally financial and in the form of shares, options, cash, or a combination of these payment vehicles.

LTIPs are used for a variety of reasons, including employee retention, performance improvement, wealth creation, and corporate glue. The way the LTIP is designed and communicated is critical for its success. There are various challenges that can hinder its effectiveness. Issues arise because companies sometimes try to achieve all objectives with a single plan. Other challenges are related to human behavior, perceived value, or responses from competitors in the labor market. Therefore, this chapter asks the question: “How to ensure effectiveness of a Long-Term Incentive Plan?”

Based on four perspectives, i.e., people, economic, risk, and operational perspective, the question is analyzed, and one or multiple answers are provided for each of the chosen perspectives. All answers are provided in light of promoting effectiveness.

In terms of the outlook for the future, it is expected that long-term incentive plans will continue to be important in the tool kit of the compensation professional. LTIPs will further evolve to be able to better measure company success in financial and nonfinancial sense and, in general, to contribute to business needs as well as individual preferences. Multiple plans may be needed to cater to different objectives, with the challenge to keep things as simple as possible.