The Empuls Glossary

Glossary of Human Resources Management and Employee Benefit Terms

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Why do companies implement long-term incentive plans?

The reasons why companies implement long-term incentive plans are:

Alignment with strategic objectives: LTIPs align employee compensation with the long-term strategic objectives of the company. By tying rewards to the achievement of specific performance goals or targets, LTIPs motivate employees to focus on activities and behaviors that contribute to the company's long-term success and value creation.

Retention and talent management: LTIPs are effective tools for attracting, retaining, and motivating top talent, particularly at the executive and senior management levels. Offering equity-based incentives or other long-term rewards helps companies retain key employees and incentivize them to remain with the organization over the long term, reducing turnover and talent attrition.

Shareholder alignment: LTIPs align employee interests with those of shareholders by tying rewards to the company's financial performance and shareholder value creation. When employees have a stake in the company's success through equity-based awards, they are more likely to act in ways that benefit shareholders and contribute to the company's overall growth and profitability.

Performance and accountability: LTIPs promote a culture of performance and accountability within the organization by setting clear performance goals, metrics, and targets for employees to achieve. By linking rewards to performance outcomes, LTIPs encourage employees to take ownership of their responsibilities, drive results, and contribute to the company's performance objectives.

Long-term value creation: LTIPs incentivize employees to focus on creating long-term value for the company rather than pursuing short-term gains or objectives. By emphasizing multi-year performance measurement periods and rewarding sustained performance over time, LTIPs encourage employees to make strategic decisions that contribute to the company's sustainable growth and success.

Employee engagement and motivation: LTIPs boost employee engagement and motivation by providing employees with meaningful incentives to perform at their best and achieve stretch goals. The promise of future rewards encourages employees to stay committed, engaged, and focused on delivering results that drive the company's long-term success.

Competitive advantage: Offering competitive LTIPs can give companies a competitive advantage in attracting and retaining top talent in a competitive labor market. Companies that offer attractive long-term incentive packages are more likely to attract high-caliber candidates and retain top performers, enhancing their ability to execute strategic initiatives and remain competitive in their industry.

Risk management and governance: LTIPs help mitigate risks associated with short-termism and excessive risk-taking by aligning employee incentives with the company's long-term objectives and risk appetite. By incorporating performance metrics and governance mechanisms, LTIPs promote responsible decision-making and prudent risk management practices within the organization.

Long-term Incentive Plan

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What is a long-term incentive plan?

A long-term incentive plan (LTIP) is a compensation structure designed to reward employees for achieving long-term strategic objectives and creating sustained value for the organization over an extended period.

LTIPs are typically implemented as part of an organization's overall compensation strategy to attract, retain, and motivate key talent, particularly at the executive and senior management levels.

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What are the key characteristics of a long-term incentive plan?

Key characteristics of long-term incentive plans include:

Performance-based rewards: LTIPs are often performance-based, meaning that the rewards employees receive are tied to the achievement of specific performance metrics or financial targets set by the organization. These metrics may include measures such as revenue growth, profitability, shareholder returns, earnings per share (EPS), or total shareholder return (TSR).

Vesting periods: LTIPs typically have vesting periods, during which employees must remain with the company and meet certain eligibility criteria to become entitled to the rewards. Vesting periods are intended to incentivize employee retention and align employee interests with long-term organizational goals.

Equity-based awards: Many LTIPs include equity-based awards, such as stock options, restricted stock units (RSUs), or performance shares, as a significant component of the overall reward structure. Equity awards provide employees with a stake in the company's future performance and align their interests with those of shareholders.

Multi-year performance measurement: LTIPs often incorporate multi-year performance measurement periods, typically spanning three to five years or longer. By focusing on long-term performance outcomes, LTIPs encourage employees to make strategic decisions that contribute to sustainable growth and value creation over time.

Goal setting and performance targets: LTIPs require clear goal setting and performance targets to define what success looks like and how rewards will be earned. These targets are typically established in alignment with the organization's strategic objectives and may be adjusted periodically to reflect changing business conditions.

Communication and transparency: Effective communication and transparency are essential components of LTIPs to ensure that employees understand the program's objectives, performance metrics, eligibility criteria, and potential rewards. Clear and consistent communication helps employees stay engaged and motivated to achieve long-term goals.

Risk management and governance: LTIPs require robust risk management and governance mechanisms to mitigate potential risks and ensure that incentive plans are aligned with the organization's risk appetite and values. This may include oversight from the board of directors, compensation committee, or other governing bodies.

Why do companies implement long-term incentive plans?

The reasons why companies implement long-term incentive plans are:

Alignment with strategic objectives: LTIPs align employee compensation with the long-term strategic objectives of the company. By tying rewards to the achievement of specific performance goals or targets, LTIPs motivate employees to focus on activities and behaviors that contribute to the company's long-term success and value creation.

Retention and talent management: LTIPs are effective tools for attracting, retaining, and motivating top talent, particularly at the executive and senior management levels. Offering equity-based incentives or other long-term rewards helps companies retain key employees and incentivize them to remain with the organization over the long term, reducing turnover and talent attrition.

Shareholder alignment: LTIPs align employee interests with those of shareholders by tying rewards to the company's financial performance and shareholder value creation. When employees have a stake in the company's success through equity-based awards, they are more likely to act in ways that benefit shareholders and contribute to the company's overall growth and profitability.

Performance and accountability: LTIPs promote a culture of performance and accountability within the organization by setting clear performance goals, metrics, and targets for employees to achieve. By linking rewards to performance outcomes, LTIPs encourage employees to take ownership of their responsibilities, drive results, and contribute to the company's performance objectives.

Long-term value creation: LTIPs incentivize employees to focus on creating long-term value for the company rather than pursuing short-term gains or objectives. By emphasizing multi-year performance measurement periods and rewarding sustained performance over time, LTIPs encourage employees to make strategic decisions that contribute to the company's sustainable growth and success.

Employee engagement and motivation: LTIPs boost employee engagement and motivation by providing employees with meaningful incentives to perform at their best and achieve stretch goals. The promise of future rewards encourages employees to stay committed, engaged, and focused on delivering results that drive the company's long-term success.

Competitive advantage: Offering competitive LTIPs can give companies a competitive advantage in attracting and retaining top talent in a competitive labor market. Companies that offer attractive long-term incentive packages are more likely to attract high-caliber candidates and retain top performers, enhancing their ability to execute strategic initiatives and remain competitive in their industry.

Risk management and governance: LTIPs help mitigate risks associated with short-termism and excessive risk-taking by aligning employee incentives with the company's long-term objectives and risk appetite. By incorporating performance metrics and governance mechanisms, LTIPs promote responsible decision-making and prudent risk management practices within the organization.

Who are the typical recipients of long-term incentive plans within a company?

Here are some of the typical recipients of LTIPs:

Executive leadership team: Members of the executive leadership team, including the CEO, CFO, COO, and other C-suite executives, are often among the primary recipients of LTIPs. These individuals are responsible for setting strategic direction, making critical decisions, and driving overall organizational performance.

Senior management: Senior-level managers and leaders across various functions and departments may also participate in LTIPs. This may include vice presidents, directors, and other senior executives who have significant influence over business operations, performance, and outcomes.

Top performers and high-potential employees: Companies may offer LTIPs to top performers and high-potential employees who demonstrate exceptional performance, leadership potential, and a strong commitment to the organization's success. Recognizing and rewarding these individuals with long-term incentives helps motivate them to continue delivering exceptional results and remain with the company.

Key contributors to strategic initiatives: Employees who play key roles in driving strategic initiatives, projects, or transformational efforts may be eligible to participate in LTIPs. These individuals are responsible for executing critical initiatives that contribute to the company's long-term growth, innovation, and competitive advantage.

Critical talent segments: Companies may target specific talent segments or critical skill areas for LTIP participation to address talent shortages, succession planning needs, or strategic workforce priorities. This may include employees with specialized expertise, technical skills, or industry knowledge that are essential for the company's success.

Board of directors: In some cases, members of the board of directors may receive LTIP awards as part of their compensation package to align their interests with those of shareholders and incentivize active participation in governance and oversight responsibilities.

Acquired or retained talent: LTIPs may be used as part of talent acquisition or retention strategies to attract and retain key talent during periods of growth, transition, or organizational change. Offering attractive long-term incentives can help companies secure the commitment of valuable employees and mitigate talent risks.

Succession planning candidates: Succession planning candidates, including potential successors to executive or leadership positions, may participate in LTIPs to prepare them for future leadership roles within the organization. Providing long-term incentives to succession candidates helps groom them for leadership and ensures continuity of leadership over time.

How often are long-term incentive plan payouts typically made?

Typically, LTIP payouts are made according to one of the following schedules:

Vesting periods: Many LTIPs have vesting periods during which employees must remain with the company and meet certain eligibility criteria to become entitled to the rewards. Vesting periods can vary in length but commonly range from three to five years or longer. Once the vesting period is complete, employees become eligible to receive their LTIP payouts.

Performance measurement periods: LTIP payouts may be based on the achievement of specific performance goals or targets over a predetermined performance measurement period. Performance measurement periods typically align with the company's fiscal year or other reporting periods and may span multiple years. Payouts are made at the end of the performance measurement period based on the extent to which performance goals are met.

Annual or periodic payouts: Some LTIPs provide for annual or periodic payouts based on the company's performance or other predetermined criteria. For example, cash incentive plans or performance share plans may provide for annual payouts based on annual performance targets or financial metrics. These payouts are typically made at the end of each performance period or fiscal year.

Milestone-based payouts: In certain cases, LTIP payouts may be tied to the achievement of specific milestones or events, such as the completion of a strategic initiative, a merger or acquisition, or the attainment of a certain market valuation. Payouts are made upon the successful completion of the milestone or event as outlined in the LTIP.

Lump-sum or installment payments: LTIP payouts may be made in a lump sum or in installments, depending on the terms of the plan and the preferences of the company. Lump-sum payments provide employees with the full value of their LTIP awards at once, while installment payments distribute the value of the awards over multiple periods.

How does a long-term incentive plan work?

Here's how a typical LTIP works:

Goal setting: The organization establishes long-term performance goals or objectives that align with its strategic priorities and shareholder interests. These goals may include financial metrics (e.g., revenue growth, profitability, earnings per share), operational targets (e.g., market share, customer satisfaction), or other strategic objectives.

Designing the plan: The organization designs the LTIP, including the types of incentives to be offered (e.g., stock options, restricted stock units, performance shares), eligibility criteria, performance measurement periods, vesting schedules, and payout structures. The plan is typically developed in consultation with the board of directors, compensation committee, or other relevant stakeholders.

Communication and rollout: The organization communicates the details of the LTIP to eligible employees, including the goals, performance metrics, eligibility criteria, potential rewards, and the timeline for participation. Clear and transparent communication is essential to ensure that employees understand the program's objectives and how they can earn rewards through their performance.

Performance measurement: Throughout the performance measurement period, the organization tracks and evaluates progress toward the established goals or objectives. Performance metrics are monitored regularly to assess performance against targets and determine whether employees are on track to earn rewards under the LTIP.

Vesting and eligibility: Employees must meet certain eligibility criteria and remain with the organization for the duration of the vesting period to become entitled to the rewards offered under the LTIP. Vesting schedules may vary but often require employees to fulfill specific tenure requirements or performance conditions before becoming eligible to receive rewards.

Reward calculation: At the end of the performance measurement period, the organization calculates the rewards earned by eligible employees based on their performance against the established goals or objectives. Rewards may be calculated based on predetermined formulas, performance scores, or other objective criteria outlined in the LTIP.

Distribution of rewards: Once rewards have been calculated, the organization distributes them to eligible employees according to the terms of the LTIP. Rewards may be paid out in the form of cash bonuses, company stock, or other equity-based awards, depending on the structure of the plan and the preferences of the organization.

Evaluation and review: After the completion of each performance measurement period, the organization evaluates the effectiveness of the LTIP in driving performance, achieving strategic objectives, and aligning employee interests with shareholder interests. Feedback from participants and stakeholders may be used to inform adjustments or refinements to the LTIP for future periods.

Employee pulse surveys:

These are short surveys that can be sent frequently to check what your employees think about an issue quickly. The survey comprises fewer questions (not more than 10) to get the information quickly. These can be administered at regular intervals (monthly/weekly/quarterly).

One-on-one meetings:

Having periodic, hour-long meetings for an informal chat with every team member is an excellent way to get a true sense of what’s happening with them. Since it is a safe and private conversation, it helps you get better details about an issue.

eNPS:

eNPS (employee Net Promoter score) is one of the simplest yet effective ways to assess your employee's opinion of your company. It includes one intriguing question that gauges loyalty. An example of eNPS questions include: How likely are you to recommend our company to others? Employees respond to the eNPS survey on a scale of 1-10, where 10 denotes they are ‘highly likely’ to recommend the company and 1 signifies they are ‘highly unlikely’ to recommend it.

Based on the responses, employees can be placed in three different categories:

Promoters
Employees who have responded positively or agreed.
Detractors
Employees who have reacted negatively or disagreed.
Passives
Employees who have stayed neutral with their responses.

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The Empuls Glossary

Why do companies implement long-term incentive plans?

Long-term Incentive Plan

What is a long-term incentive plan?

What are the key characteristics of a long-term incentive plan?

Why do companies implement long-term incentive plans?

Who are the typical recipients of long-term incentive plans within a company?

How often are long-term incentive plan payouts typically made?