The Power of the Long-Term Incentive Plan in Compensation Planning for Goal Achievement & Employee Retention

Key Takeaways

• A long-term incentive plan (LTIP) rewards employees for sustained performance typically over three to five years, linking their contributions to organizational growth and profitability.
• Common LTIP vehicles include stock options, performance units, restricted units, appreciation rights, phantom stock, employee stock purchase plans, and cash-based programs.
• LTIPs fall into two categories: multi-year plans tied to fixed or rolling performance periods, and career-based plans that accrue value over an individual's tenure, payable at retirement or a liquidity event.
• Effective LTIP design requires alignment with long-term organizational goals, appropriate performance metrics, participant-level calibration, competitive benchmarking, and compliance with IRC Sec. 409A.
• Short-term incentives (STIs) and LTIPs complement each other within a balanced total compensation strategy, rewarding both immediate results and sustained value creation.
• In a case study involving a family-owned construction firm, a phantom LTIP with tiered participation and a five-year cliff vesting schedule strengthened retention and aligned compensation with enterprise value growth.

We have seen a shift in today’s employment market from candidate-driven to employer driven. Along with this shift, employers are taking (back) control in critical areas that impact the People Operation function. Some of these changes include a shift in remote work schedules, implementation and enforcement of performance management and productivity standards, upgrades in talent, and a move toward variable compensation tied to sustained company performance (including both an annual incentive and a long-term incentive plan).

Well-positioned employers are reevaluating their annual incentive compensation programs that were once designed for maximum payouts or hitting “lay-up” goals to combat the potential loss of talent during the candidate-driven market. Top-line growth, profitability metrics, or a combination of both now drive these programs.

We are also designing more plans that part from company-wide bonus awards to factor in the participant’s specific performance or “value add” contribution. These plans take into consideration both quantitative metrics such as output or incremental growth and qualitative metrics such as leadership development, client satisfaction, and brand alignment/enhancement.

To create “stickiness” and retain the highest-level contributors, subject matter experts, and critical impact positions, we have seen an increase in the design and implementation of long-term incentive plans. These plans are meant to align the long-term goals of the organization by rewarding participants that have a critical impact on the business.

What Is a Long-Term Incentive Plan, or LTIP?

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.
2. 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.

A Quick Note on Short-Term Incentives (STIs) vs. Long-Term Incentives (LTIs)

STIs are rewards like annual bonuses or commissions that recognize achievements within a single year. These incentives focus on motivating quick results and help align everyone’s efforts with immediate organizational goals, complementing the longer-term approach of LTIPs.

Together, STIs and LTIPs create a balanced total compensation strategy that both rewards short-term accomplishments and supports sustained growth, reinforcing your organization’s ability to compete for top talent.

Why LTIPs Are 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.

What Should You Consider When Designing Effective LTIPs?

Consider these factors when designing your plan:

• Long-term organizational goals: The LTIP's performance period and metrics should map directly to the company's strategic plan. If the organization is focused on revenue growth over the next five years, the plan's targets should reflect that trajectory. If the priority is margin improvement or market expansion, the metrics should shift accordingly. A plan that isn't anchored to where the business is headed becomes a retention tool without strategic alignment.
• The participant’s level and areas of responsibility: Not every participant should receive the same award opportunity. Tiered participation where senior leaders receive larger potential payouts and mid-level contributors participate at scaled levels reflects differences in scope and impact. The design should also consider whether participants have line-of-sight to the metrics they're being measured against; a VP of operations can influence cost efficiency but may have limited control over top-line revenue.
• The competitive landscape: Benchmark your total compensation package, including the LTIP component, against peer organizations in your industry and geography. If competitors are offering long-term incentives and you are not, you risk losing key talent to firms with more compelling total rewards. Conversely, understanding what peers offer helps you calibrate award levels that are competitive without being unnecessarily costly.
• Impactful performance metrics: Choose metrics that participants can influence and that meaningfully reflect business health. Common LTIP metrics include revenue growth, EBITDA, return on invested capital, and enterprise value appreciation. Avoid selecting too many metrics — two to three well-chosen measures are more motivating and easier to communicate than a complex scorecard. Where possible, pair a financial metric (such as profitability) with a qualitative or operational metric (such as client retention or safety performance) to discourage short-term thinking.
• Regulatory compliance requirements: Any LTIP that defers compensation beyond the short-term deferral window must be tested against Internal Revenue Code (IRC) Sec. 409A, which governs non-qualified deferred compensation. Noncompliance can trigger a 20% excise tax plus interest for participants. Work with a compensation consultant and tax or legal advisor to confirm that the plan's deferral elections, vesting provisions, payment events, and distribution timing all satisfy 409A requirements before rolling the plan out.

Ideally, these awards should be paid in cash, although equity may also be used (see above options). Performance periods may be designed (performance management can help) 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; they are considered non-qualified deferred compensation and subject to substantial penalties, including taxes and interest, for non-compliance. Remember, work with a trusted compensation, tax, or legal advisor to check this compliance.

Enable Employee Retention & Lasting Company Success With an LTIP

Careful planning in the design stage of an LTIP will safeguard 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.

LTIP Case Study: Retaining Key Talent in a Competitive Construction Market

The Goal: Elevate the Total Rewards Strategy to Retain Key Employees

In working with a second-generation, family-owned business operating in the electrical contracting and broader construction space, the organization’s leadership sought to establish a long-term incentive framework that aligned employee retention with enterprise value creation.

The company experienced steady growth and wanted to make sure that key contributors were both recognized and retained through the next phase of its evolution. Importantly, the owners were focused on preserving the culture of the business while introducing a more sophisticated total rewards strategy that would mirror practices commonly seen in larger, more institutionalized organizations.

The Solution: LTIP to Reward Future Employee Success & Company Prosperity

To address these objectives, we designed and implemented a Phantom Long-Term Incentive Plan (LTIP). We structured it to reward participants based on the future appreciation in the value of the business over an anticipated six- to seven-year horizon. The use of a phantom equity vehicle allowed the organization to deliver an ownership-like experience, linking payouts directly to enterprise value growth, without diluting actual ownership or complicating the existing family governance structure. This design proved particularly effective given the company’s desire to maintain control while still creating a compelling wealth-building opportunity for key employees.

The program was intentionally structured with tiered participation levels to reflect differences in role, responsibility, and impact across the organization. Senior leaders received larger award opportunities, while high-potential and critical mid-level contributors were included at scaled levels, reinforcing a broader sense of shared success.

LTIP Vesting in Action

The plan uses a five-year vesting schedule. Also, it incorporates a three-year cliff in which 60% of the award vests upon completion of the initial period, followed by incremental vesting of 20% at the conclusion of years four and five. This structure balanced retention objectives with motivational impact, preserving participant engagement through the most critical growth period.

From a payout perspective, the plan incorporates dual performance triggers to reinforce alignment with business outcomes. Participants receive payouts when the company hits a predefined revenue milestone at or beyond year six, or earlier in the event of a change in control transaction, whichever occurs first. This approach provides flexibility to recognize value creation under multiple strategic scenarios, including continued organic growth or a potential liquidity event, both of which were under consideration by ownership.

Finally, Compensation Resources designed the LTIP as an ongoing component of the company’s total rewards strategy, with an initial grant complemented by the expectation of future annual grants. This “rolling grant” approach enhances retention by continuously refreshing the incentive horizon and deepening participant engagement over time.

The Result: Market-Aligned Total Compensation on Par with Enterprise Organizations

As implemented, the program not only strengthened the company’s ability to retain and motivate key talent, but also introduced a disciplined, market-aligned framework for linking compensation to long-term business performance, positioning the organization for sustained success. This success persists despite the highly competitive and cyclical construction industry, which struggles with a limited talent pool of licensed electricians and project managers, to name a few.

From Case Study to Action: Your Long-Term Incentive Plan

This case study illustrates what a long-term incentive plan looks like in practice, but every organization's plan will look different. The industry, ownership structure, growth trajectory, and talent pressures unique to your business will all shape the design.

What stays constant are the fundamentals: define the right metrics, set a vesting schedule that keeps people engaged through the critical period, structure payouts around realistic business scenarios, and make sure the plan holds up under 409A. The case above worked because the design was tailored to a specific company's goals, not borrowed from a template.

To get started on a custom LTIP for your organization, fill out the form.

Disclaimer: Long-term incentive plans such as phantom equity plans are generally governed by Internal Revenue Code Section 409A, which regulates the taxation of non-qualified deferred compensation arrangements. Section 409A establishes strict rules regarding the timing of deferral elections, vesting provisions, payment events, and the form and timing of distributions. This case study is for general information and design purposes and does not constitute legal or tax advice.