Updated By: Mary Rizzuti, CCP, PHR, SHRM-CP on 05/07/21
Written By: Paul R. Dorf, APD, CRI on 05/28/13
In today’s tight labor market, we have seen a trend where employers are paying premiums to attract and retain talent in the form of base salary and other short-term incentives (such as annual bonus programs). Of continued interest, is the desire to align the long-term strategy of the Company by rewarding key contributors, as the Company reaches its goals.
While publicly-traded companies use stock as a compensation vehicle tool by which to reward and retain their executives, their privately-held counterparts are also finding ways to compete with long-term incentives (LTIPs). LTIPs may comprise at least one-third of the typical executive’s total compensation package.
Long-Term Incentive Plans are specifically-designed incentive programs that provide a significant potential award over and above base salary and annual incentives/bonuses covering performance periods in excess of 1 year. LTIPs fall into two major categories: (1) multi-year plans tied to three to five years fixed or rolling performance periods; and (2) career-based plans in which the benefits accrue over the individual’s working career, to be paid when they retire.
The design feature that is most important for private companies is that the awards are paid in cash, although equity may also be used. 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. LTIPs provide a vehicle for retention, focus on desired results, balance between short- and long-term strategic planning, and accountability for corporate results.
It is important to ensure that an LTIP plan is compliant with IRC §409A, since it is considered non-qualified deferred compensation, and subject to substantial penalties for non-compliance.