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Long-term incentive plan, LTIP [+Real-life example]

long term incentive plan

What is a long-term incentive plan (LTIP)?

A long-term incentive plan (LTIP or LTI plan) is a compensation program that offers your employees incentives beyond their basic salary for achieving predetermined goals. The payment is deferred and usually spreads over 3-5 years to stimulate ongoing progress.

Having an LTI plan can assist with focusing employees on targets required to help you reach specific goals and propel your company forward to success. That said, LTIPs are a common strategy used by companies: 97% of public companies and 68% of private companies offer LTIPs to their senior executives. (Source: Pearl Meyer Report 2024)

An LTI plan comes in all sorts of shapes and sizes – here’s a simple guide to help you find the best long-term incentive plan design that suits your company.

Who is eligible to get LTIPs?

LTIPs are often reserved for executive-level and above whether it’s a private or public company, but many companies are starting to grant them to employees below the executive level. According to the same study, approximately 53% of public company respondents make some grants below the vice president (VP) level.

However, because of their liquidity, private companies’ long-term award opportunities for both executives and broad-based employees are often used less than in public companies.

Why do companies use LTIPs?

LTIPs can be a win-win deferred compensation strategy for both employers and employees:

Focus on long-term profits/benefits 
Short-term profits are great but can come at a cost. Oftentimes, they come at the expense of customer relationships and are unsustainable.

LTIPs, however, can align your company’s interests with the interests of your employees over a long period of time. They’re not only trying to hit targets for this year, but also moving the company forward to sustain its growth in the long run.

– Help attract, reward and retain talent
With LTIPs, your employees have the opportunity to earn additional financial rewards to share in the wealth of a company.

This financial benefit can be a powerful recruitment tool. It’s also more likely for employees to stick around longer as their long-term pay holds them accountable for implementing it over the next couple of years.

– Save time and money on hiring senior employees
Employee turnover can be an unnecessary black hole for your profits – according to studies when a business replaces a salaried employee, it costs six to nine months’ salary, on average, to train their replacement.

This is more of an issue these days when most employees only remain with a company for an average of two years.

Talk to us today to establish an LTIP that fits your business’s interests and philosophy.

Different types of long-term incentive plans

There are essentially four different types of long-term incentive plans.
LTIP plan Types mindmap : Appreciation based, stock based, performance base and cash-based
Appreciation-based award
Time-based award
Performance-based award
Cash-based award
Meaning
The amount depends on how much the company’s value increases over time.
Only available to employees after a certain amount of time in the company.
Only available to employees after meeting certain goals, rather than time.
Given to employees as a cash bonus
Examples
Stock options
Restricted stock units (RSUs)
Performance shares/units
Performance -based cash
LTI prevalence among executives in public companies*
Options: 33%
RSUs: 85%
Performance shares/units: 76%
N/A
LTI prevalence among executives in private companies*
Options: 25%
RSUs: 10%
Performance shares/units: 8%
Performance cash: 46%
*Source: Pearl Meyer Report 2024

Which one is right for you? 

Depending on your industry and your jurisdiction, your company might be better suited to one of these over the others so, it’s important to understand the positives and negatives of each one.

Appreciation-based awards (e.g. stock options)

✓ PRO: Appreciation-based awards can have monetary upsides for employees in the case of company stock price appreciation, particularly in startups and growing companies.

✓ PRO: This type of award is also very flexible. You can decide when and how often your employees receive the awards by customizing the vesting period (i.e. waiting period before they receive 100% award ownership). Check out our ‘’What is stock vesting?’’ guide to design the best vesting schedule for your needs.

✓ PRO: Employees may qualify for preferential tax treatment.

✖ CON: Employees, however, need to pay for their stock options at the pre-set price (exercise price) when they decide to exercise (purchase) their options after vesting. They profit by ‘buy low sell high’.

✖ CON: There is a risk with these awards, e.g. they can potentially be worthless should their value drop below the exercise price (i.e. underwater stock option)

Time-based awards (e.g. RSUs)

✓ PRO: In the case of an RSU – a full value award, employees almost always will receive some positive value as long as the shares don’t go below zero. So, RSUs are considered less risky than stock options.

✓ PRO: RSUs are usually granted for free, so employees don’t need to pay for the grant.

✓ PRO: They’re subject to a vesting period, which means you can customize the process of making them available to employees.

✖ CON: Employees cannot control the timing of taxation with RSUs as ordinary income tax is due once they vest. But with stock options, tax is only due when they decide to exercise stock options.

Performance-based awards

✓ PRO: Performance-based awards ensure that employees are not just waiting for their vesting. In order to receive their bonus, the employees need to hit certain targets. It’s easy to see why this is an enticing plan for companies.

✓ PRO: Performance shares help align the goals of executives and other employees with those of shareholders.

✖ CON: If the targets are not set correctly or are too hard to achieve, the employees could lose morale as they don’t receive anything.

Cash-based awards

✓ PRO: Cash is the most reliable form of bonus without ownership dilution issues.

✓ PRO: It is a popular LTI award for private companies as they have little liquidity and their share valuation is often more complicated.

✖ CON: It’s best to avoid these if cash flow is important to your company’s growth.

✖ CON: Employees receiving cash may not feel as invested in the company as those receiving stock.

When and how are LTIPs paid out?

Vesting determines when and how an LTI award is paid out.

Vesting means the waiting period before receiving 100% of the LTI ownership. For example, if your vesting period is three years, the incentives will be fully available to the recipient (i.e. you can sell and/or exercise them) once the 3-year period has passed.

There are two common ways of vesting – cliff vesting and ratable vesting. Cliff vesting is a process where a participant receives full award ownership on a given date while ratable/graded vesting allows a participant to gain award ownership in intervals.

Full Year(s) of Service
3-Year Cliff Vesting
6-Year Graded Vesting
1
0%
0%
2
0%
20%
3
100%
40%
4
Nil
60%
5
Nil
80%
6
Nil
100%

A real-life example of a long-term incentive plan

Headquartered in San Francisco, USA, Uber is a ride-hailing tech company that adopts long-term incentive plans to satisfy multiple business goals. They include: 1/ encouraging equity ownership and executive retention, 2/ reinforcing the need for long-term sustained financial performance, and 3/ aligning the interests of executives and stockholders.

The components of their 2022 executive compensation program are base salaries, annual cash incentives, and long-term incentives (equity-based) which represent 96% of the CEO’s target compensation and 92% of other NEOs’ average target compensation.

Their long term equity incentives come in the form of stock options (CEO only), RSUs, and performance-RSUs:

  • Options: Reserved for the CEO, they vest 25% per year over four years, providing additional retentive value through annual cliff vesting.
  • RSUs: Allocated to both the CEO and other NEOs, they vest over four years.
  • Performance-RSUs: While previously only granted to certain NEOs, they are now granted to all of Uber’s NEOs to drive the achievement of key financial, operational, and strategic objectives. They vest based on target achievement at the end of the three-year performance period.

Overall, Uber’s plan is quite similar to the trends observed in the Pearl Meyer 2024 report where RSU and performance shares/units are commonly used in public companies. 

To learn more about how to develop an LTIP to best suit your business, head over to our ”Guide to LTIP best practices”.

Contact Global Shares

Here at Global Shares, we spend all day coming up with ways to help our clients manage their LTIPs. It’s what has made us an award-winning equity management company for over 15 years.
We can take you through the launch of your plan, from the right LTI awards to the right vesting, plan rules and a whole lot more. 

Contact us for a commitment-free demo today.

FAQs about a long-term incentive plan

What is a long-term incentive plan?

A long-term incentive plan (LTIP or LTI plan) is a compensation program that offers your employees incentives beyond their basic salary for achieving predetermined goals. The payment is deferred and usually spreads over 3-5 years to stimulate ongoing progress.

Having an LTI plan can focus employees on targets to help you reach specific goals and propel your company forward to success.

Who is eligible to get LTIPs?

LTIPs are often reserved for executive-level and above whether it’s a private or public company, but many companies have begun to grant them to employees below the executive level. According to a recent study, approximately 53% of public company respondents make some grants below the vice president (VP) level.

Why do companies use LTIPs?

LTIPs have the potential to be a win-win deferred compensation strategy for both employers and employees. Some benefits are 1/ Focus on long-term profits/benefits, 2/ Encourage employees to remain with the company, 3/ Save time and money on hiring senior employees.

How many types of long-term incentive plans?

There are essentially four different types of long-term incentive plans – Appreciation-based, Time-based, Performance-based and Cash-based awards.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

By visiting a third-party site, you may be entering an unsecured website that may have a different privacy policy and security practices from J.P. Morgan standards. J.P. Morgan is not responsible for, and does not control, endorse or guarantee, any aspect of any linked third-party site. J.P. Morgan accepts no direct or consequential losses arising from the use of such sites.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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