LTIP 101 | Unlocking the Benefits of a Long-Term Incentive Plan

by | Published on Sep 5, 2023 | Academy

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LTIP meaning

Long-term incentive plans (LTIPs) have become an essential part of employee retention and motivation strategies for businesses worldwide. Through various types of LTIPs, such as stock-based, performance-based, and retirement-focused plans, employees are rewarded for achieving long-term performance goals and aligning their interests with the company’s growth. In this blog post, we’ll dive into the intricacies of LTIPs, explore their benefits and challenges, and provide guidance on designing an effective LTIP tailored to your company’s needs.

Key Takeaways

  • Understand how Long-Term Incentive Plans (LTIPs) align employee interests with the company’s growth objectives.
  • Learn about stock, performance and retirement focused plans and their respective features & potential benefits.
  • Consider rewards eligibility criteria, tax implications and challenges to ensure an effective LTIP for your organization.
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Understanding Long-Term Incentive Plans (LTIPs)

LTIPs are compensation strategies designed to retain and motivate key employees by providing rewards for meeting long-term performance goals and aligning their interests with the company’s growth objectives. They are offered by employers to incentivize employees to achieve objectives that will result in increased shareholder value. These plans are particularly beneficial for private companies, where traditional equity-based incentives may not be feasible or desirable.

LTIPs primarily comprise of:

  • Performance measures
  • Rewards
  • Eligibility criteria
  • Vesting schedules

The company’s board is instrumental in crafting and sanctioning LTIPs, guaranteeing alignment with the company’s long-term objectives and offering suitable incentives for employees.

Overlapping LTIP performance periods can keep employees persistently motivated to meet long-term objectives through a long term incentive plan, providing them with multiple chances to earn rewards over time.

Key Components of LTIPs

LTIPs primarily comprise of performance measures, rewards, eligibility criteria, and vesting schedules. Performance measures are used to assess the performance of an employee or team based on specific performance criteria, which may include sales, profits, customer satisfaction, and other key performance indicators.

Rewards, such as monetary bonuses, stock options, or other forms of executive compensation, are provided to employees or teams for achieving or surpassing performance objectives. Eligibility criteria may include job title, years of service, or other factors used to determine who is eligible to receive rewards.

Vesting schedules refer to the timelines used to determine when rewards are paid out and can include immediate vesting, cliff vesting, graded vesting, or other vesting schedules.

How LTIPs Work

LTIPs work by setting specific performance targets and offering rewards, such as stocks or cash, to employees who meet these goals over a predetermined period. These plans serve as an extra source of income for employees, helping the employer maintain a dedicated workforce while guaranteeing that performance objectives are achieved.

The ultimate aim is to create a congruence between a company’s performance objectives and the objectives of its employees over an extended period, fostering employee loyalty and reducing the time and cost associated with recruiting senior employees.

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Types of Long-Term Incentive Plans

LTIP meaning

There are various types of LTIPs that companies can implement, each with unique benefits and drawbacks. The three main types of LTIPs include stock-based plans, performance-based plans, and retirement-focused plans.

We will delve into each of these types in the subsequent sections, highlighting their distinct features and possible benefits for both companies and employees.

Stock-Based Plans

Stock-based plans, such as stock options and restricted stock units, offer employees ownership in the company and potential for significant financial gains. These plans typically involve the granting of equity awards, which can be appreciation-based or time-based. Appreciation-based awards, such as stock options and stock appreciation rights (SARs), are contingent upon the increment of the company’s value over time. In contrast, time-based awards, such as restricted stock, are only accessible to employees after a predetermined amount of time with the company.

Employees generally do not have to pay for their SARs upon availability following vesting, whereas they must pay for their stock options at the predetermined price (exercise price) when they choose to exercise (purchase) their options after vesting. Stock-based plans can be particularly attractive to employees, as they provide an opportunity for substantial financial gains if the company’s stock value increases over time.

Performance-Based Plans

Performance-based plans link rewards to the accomplishment of specific performance targets, which keeps employees concentrated on propelling company growth. These plans often involve performance share units (PSUs), performance shares, or other performance-based awards that are granted to employees who achieve predefined performance objectives. By linking rewards to performance, these plans can help align employee incentives with company goals and objectives, fostering a culture of high performance and accountability.

However, setting challenging performance targets in performance-based LTIPs can also present risks, such as the potential for decreased employee morale if they believe the goals are unattainable. Striking a balance between setting ambitious objectives and making certain that employees feel motivated and backed in their efforts to achieve these goals is vital.

Retirement-Focused Plans

Retirement-focused plans, like 401(k) matching, incentivize employees to save for retirement while benefiting from employer contributions. These plans generally involve employer contributions to an employee’s retirement account, such as a 401(k), with the employer offering to match a portion of the employee’s contributions or provide a lump sum contribution. By encouraging employees to save for their future, retirement-focused plans can help them establish a secure financial future and promote long-term loyalty to the company.

Some examples of retirement-focused LTIPs include deferred compensation plans, pension plans, and employee stock ownership plans (ESOPs). Each of these plans can offer unique benefits and features, making them an attractive option for companies looking to incentivize and retain top talent.

Vesting Schedules and Their Impact on LTIPs

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Vesting schedules play a critical role in LTIPs, as they determine when employees can access their rewards. There are two primary types of vesting schedules: cliff vesting and graduated vesting. In cliff vesting, employees receive the entire award at a predetermined future date, following a predetermined period of time.

Graduated vesting, on the other hand, is a process in which the award vests a portion at a time, often over several years. The choice of vesting schedule can significantly impact employee retention and motivation, as it influences when employees can access their rewards and how long they must remain with the company to receive them.

Through meticulous design of vesting schedules, companies can balance the act of incentivizing employees to stay with the company and rewarding them for their performance and loyalty.

Designing an Effective LTIP for Your Company

Designing an effective LTIP for your company requires setting clear performance measures, determining suitable rewards, and establishing eligibility criteria for employees.

We will delve into these key components more thoroughly in the subsequent sections, offering guidance and best practices to create a successful LTIP that aligns with your company’s goals and objectives.

Setting Performance Measures

Performance measures, also known as performance metrics, should be carefully selected to align with your company’s goals and objectives, ensuring employees are focused on driving long-term growth and improving company performance. These measures may include metrics such as:

  • Relative Total Shareholder Return (TSR)
  • Return measures
  • Earnings per share (EPS)
  • Achievement of specific goals over an extended period

Selecting performance measures that mirror your company’s priorities can help establish an LTIP that spurs employees to contribute to the organization’s success.

Determining Rewards and Eligibility

When determining rewards and eligibility criteria for your LTIP, it is important to consider the specific needs of your company and its employees. Balancing the desire to incentivize performance with the need to retain top talent can help ensure the success of your LTIP.

Adapting rewards and eligibility criteria to your company’s distinct circumstances can help form an LTIP that not only motivates employees to excel but also cultivates a culture of loyalty and commitment.

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Tax Implications of LTIPs

The tax implications of LTIPs can vary depending on the type of plan and the timing of rewards. Some plans, such as stock-based LTIPs, may be subject to taxation upon vesting, with the employee liable for taxes on the stock’s value at the time of vesting. In contrast, performance-based LTIPs are generally subject to taxation upon sale or exercise, meaning that the employee will incur a tax liability on the difference between the stock value at the time of sale or exercise and the stock value at the time of vesting.

Both companies and employees need to comprehend the tax implications of their chosen LTIP and strategize accordingly. Awareness of the potential tax liabilities linked with different types of LTIPs allows companies to craft plans that lessen the tax burden on employees while still offering appealing performance and retention incentives.

Real-World LTIP Examples

Real-world LTIP examples demonstrate the variety of approaches companies can take in designing and implementing these plans, highlighting the importance of customization and flexibility. For instance, Autostore, a leading provider of warehouse automation solutions, implemented an LTIP designed to enhance employee retention, increase company stock value, and promote sustainable value. The plan included share options, PSUs, and/or RSUs for executives, with the vesting period for share options set at three years and the exercise price at NOK21.88 per share.

These real-world instances demonstrate the variety of strategies companies can employ in building and implementing LTIPs, emphasizing the importance of customization and flexibility. By carefully considering the specific needs and objectives of their organizations, companies can design LTIPs that effectively incentivize performance, retain top talent, and drive long-term growth.

Challenges and Drawbacks of LTIPs


While LTIPs offer numerous benefits for companies and employees alike, there are also potential challenges and drawbacks to consider. One potential issue is the short-term focus that may arise when employees prioritize achieving short-term objectives to receive their rewards, rather than focusing on long-term objectives that may be more beneficial to the company. This short-term focus can lead to suboptimal decision-making and may ultimately hinder the company’s long-term success.

Another challenge associated with LTIPs is the difficulty in setting appropriate performance measures that are both attainable and ambitious. If employees perceive goals as unattainable, there is a risk of demotivation, which could result in decreased productivity and morale.

To surmount these challenges, companies must thoughtfully design their LTIPs, considering the specific needs and objectives of their organization and employees, and modify their plans as required to guarantee ongoing success and growth.


In conclusion, long-term incentive plans provide a powerful tool for companies to retain and motivate employees, driving long-term growth and success. By understanding the various types of LTIPs, their benefits, and potential challenges, and carefully designing plans that align with company goals and objectives, organizations can create a culture of high performance and commitment. As demonstrated by real-world examples, the key to a successful LTIP lies in customization, flexibility, and a clear understanding of the specific needs and objectives of both the company and its employees.

Frequently Asked Questions

How is LTIP paid out?

In a standard LTIP, the employee receives a cash incentive on top of their base salary when they meet certain criteria. This incentive is usually based on performance metrics such as revenue growth, profitability, or customer satisfaction. The incentive is typically paid out over a period of time, and the employee must remain employed with the company for

Is LTIP a bonus?

LTIP is a deferred compensation strategy designed to motivate employees and help companies retain talent, making it a bonus of sorts. It is a popular tool for companies to use to reward employees for their hard work and dedication. It can also be used to incentivize employees to stay with the company for a longer period of time. LTIP

What is an example of a LTIP?

A common example of a LTIP is a 401(k) retirement plan, where an employer may match up to 5% of an employee’s paycheck to help them save for retirement. Another form of LTIP is Restricted Stock, in which the beneficiary receives a percentage of the stock promised to them each year until the LTIP is fully vested.

What is the purpose of Long-Term Incentive Plans (LTIPs)?

Long-Term Incentive Plans (LTIPs) are used to motivate and retain key employees by rewarding their successful meeting of long-term performance goals, thereby aligning their interests with the company’s growth objectives. LTIPs are designed to provide employees with a financial reward for meeting or exceeding predetermined performance goals over a period of time. This reward is typically in the form of stock options, restricted stock, or performance shares. The goal of LTIPs is to create a long-term relationship between the company and its

What are the different types of LTIPs?

LTIPs come in three main varieties: stock-based, performance-based, and retirement-focused plans. Stock-based LTIPs are designed to reward employees with shares of the company’s stock. Performance-based LTIPs are designed to reward employees based on their performance. Retirement-focused LTIPs