Types of Long-Term Incentive Plans

The success of your business depends on the people you employ. Offering a long-term incentive plan is a great way to motivate staff and increase their morale. It also shows that you're aware of their hard work and that you want to reward it properly.

A long-term incentive program (LTIP) typically covers more than one year. It provides leveraged rewards for executives based on their performance and results over a two-to-five-year period. Think of it as a way to stimulate and retain talent.

Long-Term Incentive Plan

Hiring employees can be expensive. In fact, retaining talent is more cost-effective than recruiting and training new hires. Replacing an employee can cost six-to-nine times their monthly salary. For a business executive earning $70,000 a year, that's $35,000 to $52,500 in recruiting and training expenses.

Considering these facts, it's in your best interest to retain talent and boost your team's morale. One way to do that is to offer long-term incentive compensation. This may include restricted stock, performance shares and even cash awards.

A long-term incentive program allows you to reward executives for achieving the company's strategic objectives. It will also make your employees feel valued, leading to greater motivation and satisfaction. Money isn't always the answer. By offering performance shares and stock options, you have a better chance of retaining talent and reducing employee turnover.

There are different types of long-term incentive compensation, and each has its perks. Choosing one over another depends on your goals, business size, organizational value and other factors.

Performance Shares

Executives who achieve certain objectives over a multi-year period are typically rewarded with performance shares. For example, you may offer this type of LTIP to your employees for attaining certain earnings-per-share targets.

This kind of long-term incentive plan usually has minimum and maximum payout levels. A company may decide to offer performance shares only when its stock reaches a certain value on the market. The number of shares will depend on each employee's performance.

Stock Options

Companies can reward their managers and executives by giving them the right to purchase shares at a predetermined price every five-to-10 years. In this case, there is no cash outflow for your business, which helps reduce expenses. The drawback of giving away stock options is that it will dilute the corporate earnings per share.

The idea behind this long-term incentive program is to align incentives between a company's shareholders and employees. Think of it as a way to motivate your best people to stay with the company for as long as possible. As the stock price goes up, so does the profit for shareholders. This option is popular among startups and large companies alike.

Restricted Stock

Another way to reward and retain your employees is to offer restricted stock. You will be offering stock shares under certain conditions, such as after achieving a specific performance target or upon working for your company for a particular length of time. Furthermore, you can set limits on share sales or transfers.

Cash Awards

Your company's long-term incentive plan may also include cash awards. This option is popular among private companies and doesn't require the existence of shares. Most organizations offer cash awards upon achievement of certain performance objectives over a three-year period.

There are many other types of long-term incentive compensation available. Extra vacation days, paid sabbaticals, stock appreciation rights and phantom stocks are just a few examples. Assess your options so you can choose one that works best for your organization. Consider your company's culture, size and performance as well as your employers' needs.

References

About the Author

Andra Picincu is a digital marketing consultant with over 10 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. She holds a BA in Marketing and International Business and a BA in Psychology. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Current and former clients include The HOTH, Bisnode Sverige, Nutracelle, CLICK - The Coffee Lover's Protein Drink, InstaCuppa, Marketgoo, GoHarvey, Internet Brands, and more. In her daily life, Ms. Picincu provides digital marketing consulting and copywriting services. Her goal is to help businesses understand and reach their target audience in new, creative ways.