The Power of Long-Term Incentives in Compensation Planning for Goal Achievement & Employee Retention

In today’s competitive talent market, employers are mindful of offering highly competitive pay packages in the form of base salaries and other annual incentives (think annual bonus programs) to attract talent.  

But what about retaining high-level contributors — and encouraging them to achieve strategic performance goals? That is where long-term incentive plans (LTIPs) come into play.  

What Are Long-Term Incentive Plans, or LTIPs? 

LTIPs are incentive programs that provide a significant potential award over and above base salary and annual incentives/bonuses. LTIPs cover performance periods that typically span three-to-five-years (and in some instances even longer). 

These plans take on different forms, including:  

• Stock options – the right to purchase company stock at a fixed price. 
• Performance units – shares granted to employees based on performance. 
• Appreciation rights – allows employees to receive the increase in value of a set number of shares over a period. 
• Restricted units – an agreement to release company stock after the employee satisfies certain requirements. 
• Cash-based programs – pays out long-term incentives in cash rather than equity. 
• Employee stock purchase plans – programs letting employees purchase company stock, typically at a discounted rate.  
• Phantom stock plans – gives employees shares that mirror actual stock value but don’t transfer ownership.

 LTIPs continue to be included in total compensation packages to compete with their publicly traded counterparts. In some cases, LTIPs comprise at least one-third of the typical executive’s total compensation package.  

LTIPs fall into two major categories:  

1. Multi-year plans tied to three-to-five-year fixed or rolling performance periods. 

1. Career-based plans in which the benefits accrue over the individual’s working career, to be paid when they retire or when a liquidity event occurs. 

Why Leverage LTIPs? A Win-Win for Your Organization & Employees 

No matter which category your LTIP falls into, its purpose is to attract and retain key staff. In turn, the LTIP incentivizes these employees to achieve goals directly tied to your organization’s long-term growth.  

This is a win-win for your organization and employees.  

Key Considerations When Designing Effective LTIPs 

Consider these factors when designing your plan: 

• Long-term organizational goals 
• The participant’s level and areas of responsibility 
• The competitive landscape 
• Impactful performance metrics 
• Regulatory compliance requirements

 Ideally, these awards should be paid in cash, although equity may also be used (see above options). Performance periods may be designed to align with the company’s strategic plan and goals, with complementary metrics established at the beginning of a performance period.  

Establish vesting parameters, whether time or performance-based, and determine the distribution rules for the plan (i.e. change of control, retirement, employment separation, etc.). 

Test the plan for compliance with IRC §409A, as these plans are considered non-qualified deferred compensation and subject to substantial penalties for non-compliance. 

Enable Employee Retention & Lasting Company Success With an LTIP 

Careful planning in the design stage of an LTIP will ensure strong alignment with company goals as well as achieve a line of sight between employee contributions and company success. Additionally, a well-designed LTIP can motivate and retain key contributors.