What Is a Long-Term Incentive Plan?
A long-term incentive plan (LTIP) is a strategic company policy designed to reward employees for hitting specific performance targets that drive increased shareholder value.
Understanding Long-Term Incentive Plans
A LTIP, primarily for employees, aligns with a company’s long-term growth ambitions. When a company’s growth objectives mirror those in its LTIP, employees focus on performance factors that improve the business and, in turn, their own compensation. Such plans help retain top talent by offering substantial rewards as the company progresses in profitable directions.
Types of LTIPs
1. Retirement Plans
One common type of LTIP is the 401(k) retirement plan. When a business matches a percentage of an employee’s paycheck contributions, it encourages loyalty and long-term employment. A vesting schedule usually determines how much of the company contributions an employee can keep if they leave. Typically, after five years, employees are fully vested, meaning they keep all contributions.
2. Stock Options
Stock options are another form of LTIP. Over time, employees may be eligible to purchase company stock at a discounted price. This vested interest encourages employees to stay with the company as share ownership generally enhances over time.
3. Restricted Stock
The company may also award restricted stock to employees. Often, employees must forfeit their allocated stock if they leave before a certain period. For instance, they might gain irrevocable ownership of 25% of their gifted shares each year, becoming fully vested after five years.
Example of an LTIP
In June 2016, Konecranes PLC established a share-based LTIP for key employees. This plan rewarded employees competitively through the accrual of company shares. Participants had to remain employed with the company and achieve performance metrics based on Konecranes Group’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Rewards included shares and cash intended to cover taxes, with restrictions on transferring shares until December 31, 2018. This exemplary LTIP binds employee effort and shareholder value creation together seamlessly.
Related Terms: 401(k) plan, stock options, restricted stock, vesting schedule, EBITDA
References
- Konecranes. “Konecranes Plc Renumeration Statement (December 2016)”.
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does LTIP stand for?
- [ ] Long-Term Investment Protection
- [x] Long-Term Incentive Plan
- [ ] Long-Term Insurance Policy
- [ ] Long-Term Interest Plan
## What is the primary purpose of an LTIP?
- [ ] Providing immediate cash bonuses to employees
- [x] Aligning the interests of executives and shareholders to foster long-term company growth
- [ ] Protecting the company from lawsuits
- [ ] Encouraging short-term performance improvements
## Which of the following is a common type of incentive included in an LTIP?
- [ ] Annual salary increments
- [x] Stock options
- [ ] Monthly sales bonuses
- [ ] Health insurance benefits
## LTIPs are usually intended for which group of employees?
- [ ] All employees, regardless of position
- [x] Top executives and key directors
- [ ] Entry-level staff
- [ ] Customer service representatives
## LTIPs can help prevent what type of employee behavior?
- [ ] Increased teamwork
- [ ] Improved communication
- [ ] Incremental productivity
- [x] Short-term profit manipulation
## Over what time frame do LTIPs typically vest?
- [ ] Within 1 year
- [ ] 1-3 years
- [x] 3-5 years or longer
- [ ] At retirement
## How can LTIPs benefit shareholders?
- [ ] By reducing company expenses immediately
- [ ] By ensuring faster project completion
- [x] By aligning executive interests with shareholder interests to drive long-term value
- [ ] By boosting short-term quarterly profits
## Which of the following could be considered a performance measure in a typical LTIP?
- [ ] Personal employee milestones
- [ ] Departmental achievements
- [x] Company financial metrics, such as EPS (Earnings Per Share)
- [ ] Short-term customer satisfaction scores
## What is a potential drawback of LTIPs?
- [ ] Immediate tax benefits for the company
- [ ] Limited effect on long-term retention
- [x] Complexity in plan design and implementation
- [ ] Reduction in executive accountability
## How can LTIPs influence company culture?
- [ ] By discouraging collaboration among employees
- [ ] By fostering a short-term vision
- [ ] By focusing on daily tasks
- [x] By encouraging a long-term growth mindset among executives and key employees
