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Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
Updated June 25, 2024 Reviewed by Reviewed by Roger WohlnerRoger Wohlner is an experienced financial writer, ghostwriter, and advisor with 20 years of experience in the industry.
A long-term incentive plan (LTIP) is a company policy that rewards employees for reaching specific goals that lead to increased shareholder value.
In a typical LTIP, the employee, usually an executive, must fulfill various conditions or requirements. In some forms of LTIPs, recipients receive special capped options in addition to stock awards.
A long-term incentive plan, while geared toward employees, is really a function of the business itself striving for long-term growth. When objectives in a company's growth plan match those of the company's LTIP, key employees know which performance factors to focus on for improving the business and earning more personal compensation.
The incentive plan helps retain top talent in a highly competitive work environment as the business continues to evolve.
One type of LTIP is the 401(k) retirement plan. When a business matches a percentage of an employee's paycheck going into the plan, employees are more likely to work for the company until retirement.
The business might have a vesting schedule that determines the value of retirement account contributions a worker may take when leaving the company.
With vesting, a business typically retains part of its contributions over the first five years of a worker's employment. Once an employee is fully vested, they own all of their retirement plan contributions moving forward.
There are two types of vesting: cliff vesting and graded vesting. For example, with cliff vesting, an employee might be 0% vested after being at the company for one, two, and three years, and then be 100% vested after that. With graded vesting, an employee might be 0% vested after working at the company for a year, then 20% vested after the second year, then 40% vested after the third year, then 60% vested after the fourth year, then 80% vested after the fifth year, and then 100% vested after the sixth year of service.
Stock options are another type of LTIP. After a set length of employment, workers may be able to purchase company stock at a discount while the employer pays the balance. The worker's seniority in the organization increases with the percentage of shares owned.
In other cases, the business may give restricted stock to employees. For example, the employee may have to surrender gifted stock if resigning within three years of receiving it. For each year going forward, the worker may have rights to another 25% of the gifted stock. After five years of receiving restricted stock, the employee is usually fully vested.
In June 2016, the board of directors of Konecranes PLC agreed to a new share-based LTIP for key employees. The plan provided competitive rewards based on earning and accumulating shares of the company.
The LTIP had a discretionary period of calendar year 2016. Potential rewards were based on continual employment or service and on Konecranes Group's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Rewards were to be paid partly in Konecranes shares and partly in cash by the end of August 2017. The cash was intended to be used to cover taxes and related costs.
Shares paid under the plan could not be transferred during the restriction period, beginning when the reward was paid and ending on December 31, 2018.
An LTIP is a type of compensation that is earned right now, and paid out over time. This delay aims to motivate employees to stay with the company than they might otherwise, as a dangling carrot. As time passes, the employee will reap the rewards of the plan.
An LTIP is not necessarily the same as a bonus. A bonus might be awarded at a single moment in time, whereas a LTIP, by definition, is awarded over time.
In order to motivate employees, a LTIP typically distributes awards over a period of three to five years.
A long-term incentive plan attempts to align the interests of the employees and the business. Done well, both benefit. The incentive plan helps retain top talent in a highly competitive work environment as the business continues to evolve. And the business thrives, thanks to the work of the employees.
If you are offered an LTIP, consider your options, and be sure to fully understand the details of the plan. Vesting, for example, might happen over time—so try to weigh the tradeoffs.
