LTI Long Term Incentive: How HR and Compensation Teams Design Plans That Actually Work

Introduction

Long-term incentives (LTI) are compensation awards that reward employees for sustained performance and service over multi-year periods, typically three to five years, with payouts tied to company performance, stock price appreciation, or continued employment. This article is a practical guide to designing, implementing, and managing long term incentive plans as part of a modern total rewards strategy in U.S. organizations.

This content is written specifically for HR leaders, total rewards professionals, and compensation teams at U.S.-based organizations—from mid-market companies to enterprises—who are responsible for structuring executive compensation and key employee retention programs. If you’re an individual employee or job seeker trying to understand your own compensation, this guide isn’t designed for you; it’s built for the professionals who design these plans.

HR and compensation teams today face mounting pressure: retaining key employees in competitive talent markets, defending executive compensation decisions to boards and shareholders, and making LTI sizing decisions with salary survey data that’s often 12–18 months old before it even reaches your desk. Linking LTI design to both business strategy and market reality requires current, defensible benchmarks—something traditional survey cycles struggle to provide.

What is an LTI long term incentive? An LTI is a compensation award with a payout horizon longer than one year, typically structured as equity (stock options, restricted stock units, performance shares) or cash, designed to align employee interests with the company’s long term success and shareholder value creation.

This article covers:

Core definitions and characteristics of long term incentives
Common LTI vehicles (equity-based and cash based)
Step-by-step plan design: objectives, eligibility, vesting, performance metrics
Implementation, governance, and communication best practices
Common challenges and practical solutions
How real-time market data from platforms like SalaryCube supports defensible LTI sizing

What this article does not cover: individual tax advice, non-U.S. regulatory frameworks, or legal drafting templates. Consult legal and tax counsel for those matters.

By the end, you will be able to:

Distinguish between LTI vehicle types and select the right mix for your organization
Define vesting schedules and performance periods that support retention and performance goals
Choose and calibrate performance metrics that are measurable and aligned with corporate strategy
Use real-time market data from tools like SalaryCube’s DataDive Pro and Bigfoot Live to size grants competitively
Avoid the most common LTI design and administration pitfalls

With that foundation, let’s begin by defining long-term incentives and understanding how they fit within total compensation.

Understanding Long-Term Incentives (LTI) in Modern Compensation

Long-term incentives are compensation elements designed to reward and retain employees over an extended time horizon—typically three to five years—by tying payouts to company value, stock price, or the achievement of predefined performance goals. While LTIs have traditionally been reserved for executives, they now extend to senior managers, high-impact individual contributors, and, in many tech and growth-stage companies, to broader employee populations as well.

LTIs connect directly to the other pillars of total rewards: base pay provides stable income, short-term incentives (annual bonuses) reward near-term results, and long term incentives focus employees on sustained company performance and shareholder value over a multi year period. A clear LTI strategy reinforces pay philosophy by signaling what the organization values—retention, performance, ownership culture, or all three.

All discussion in this section reflects U.S. practices and regulations, framed for organizational decision-making, not personal financial planning.

Definition and Core Characteristics of LTI

A long term incentive is a reward earned now but contingent on multi-year performance and/or continued service, typically with a horizon of three to five years. LTIs differ widely based on company strategy, ownership structure, and eligible populations, but share several core characteristics:

Time horizon: Vesting and payouts occur over periods longer than one year, distinguishing LTIs from annual bonuses or short-term incentives.
Vesting requirements: Employees must remain employed (and often meet performance thresholds) through a predetermined time period to receive payouts.
Performance or service conditions: Awards may be time-based (service only), performance-based (meeting predetermined performance goals), or a combination.
Forfeiture risk: If an employee terminates prior to vesting, unvested awards are typically forfeited.
Alignment with shareholder or ownership value: Most LTIs are designed so that when company value increases, so does the employee’s payout.

Typical participants include executive leadership, senior management, and key employees whose decisions influence corporate profitability and long term strategic vision. In tech and growth sectors, broader populations may also participate through company stock or stock units.

From an accounting perspective, equity LTIs are expensed at grant-date fair value and recognized over the vesting period—distinct from the actual cash outlay, which occurs (if at all) at exercise or settlement. This distinction matters for budgeting and financial reporting, even if HR teams don’t manage the accounting entries directly.

How LTIs Fit Into Total Rewards and Pay Philosophy

The relationship between LTI and overall pay mix evolves by job level. Entry-level employees typically receive most of their compensation as base pay. As employees move into senior and executive roles, the proportion of long term incentives increases—often comprising 60–80% of total direct compensation for C-suite executives in public companies.

Strategic uses for LTIs include:

Retention anchor: Vesting schedules create “golden handcuffs,” reducing turnover among key employees.
Performance alignment: Performance based awards ensure payouts scale with company results.
Ownership mindset: Equity awards give employees a direct stake in shareholder value.
Competitive differentiator: Attractive LTI packages help win and retain top talent in competitive markets.

Consider how pay philosophy differs by company type: a high-growth tech company may emphasize heavy equity (stock options, RSUs) to leverage upside and conserve cash, while a mature industrial firm may rely more on cash-based long term incentive solutions to avoid dilution and simplify administration. Family owned businesses and private companies often use phantom equity or long-term cash plans for similar alignment without issuing actual company stock.

Calibrating LTI target values requires current, defensible market data. A compensation intelligence platform like SalaryCube helps benchmark total direct compensation—not just base salary—so you can size LTI grants that are both competitive and sustainable.

With this foundation, the next section explores the specific LTI vehicle types and structures that HR and compensation teams can use to build programs aligned with their goals.

Key Stakeholders in LTI Design and Governance

Designing and governing LTI plans is a cross-functional effort. The primary internal stakeholders include:

HR/Total Rewards: Owns plan design, eligibility, communication, and day-to-day administration.
Finance: Models cost, share usage, dilution, and accounting implications.
Legal: Ensures compliance with securities law, tax rules (including the Internal Revenue Code), and governance standards.
Executive Leadership: Shapes strategic intent and participates as plan recipients.
Board/Compensation Committee: Approves executive LTI plans, oversees governance, and reviews payouts.

Clear governance, delegation of authority, and documentation are especially important for public companies (subject to SEC disclosure and NYSE/NASDAQ listing requirements) and PE-backed firms (where investor scrutiny is high). Externally, investors, auditors, and regulators expect transparent, defensible LTI practices.

The choice of LTI vehicle is where these stakeholder interests and constraints converge—balancing retention, performance leverage, cost, and alignment with shareholders.

Types of LTI Long Term Incentive Vehicles

Most long term incentive plans are built from a limited set of common vehicles, each with distinct risk/reward profiles, accounting treatment, and administrative complexity. This section describes the major categories to help HR and comp teams select structures that support their strategy. This is not legal or tax advice—always consult counsel for plan-specific guidance.

Equity-Based Appreciation Awards: Stock Options and Stock Appreciation Rights (SARs)

Appreciation-based awards reward employees for share price appreciation above a fixed price, creating significant upside if the stock rises but little or no value if it doesn’t.

Stock Options:

Grant the right to purchase company stock at a predetermined exercise price, typically the stock’s closing price on the grant date.
Usually vest over 3–4 years and have 10-year terms.
Incentive stock options (ISOs) offer potential tax advantages for employees but have restrictions under the Internal Revenue Code; nonqualified stock options (NQSOs) are more common for employers due to simpler compliance and broader eligibility.
Value is realized only if the stock price rises above the option’s exercise price; if the stock price falls, options may become “underwater” with no practical value.

Stock Appreciation Rights (SARs):

Provide the right to receive the increase in share value over a base price, paid in cash or stock, without requiring the employee to purchase stock.
Simpler for employees (no cash outlay required), but can create cash flow obligations for the company if settled in cash.

When to use appreciation awards:

High-growth companies with strong belief in share price appreciation
Organizations seeking to closely link employee and shareholder returns
Situations where employees have appetite for risk and potential for significant upside

Full-Value Equity Awards: Restricted Stock and Restricted Stock Units (RSUs)

Full-value awards deliver shares or share equivalents that retain at least some value as long as the stock price is above zero upon vesting—unlike options, which can become worthless if the stock price declines.

Restricted Stock:

Actual shares issued to the employee with transfer restrictions and, in some cases, voting and dividend rights.
Typically granted to executives and founders, often with significant vesting periods.

Restricted Stock Units (RSUs):

Promises to deliver shares (or cash equivalent) at vesting; no actual shares issued until conditions are met.
Increasingly common at public companies across multiple job levels due to simplicity and perceived value.

Common vesting patterns:

3–4 year ratable (equal portions vest each year)
1-year cliff then quarterly vesting
Hybrid time/performance vesting

RSUs are generally consistent in perceived value (always “in the money” if the stock has value), making them effective for employee retention and easier to communicate than options.

Real-time market pricing data—such as that available through Bigfoot Live—helps determine grant sizes that are competitive yet affordable as share prices fluctuate throughout the year.

Performance shares and performance share units are equity awards with vesting or payout tied to multi-year performance against predefined performance goals—such as 3-year relative total shareholder return (TSR), EPS growth, revenue growth, or return on invested capital (ROIC).

Typical design elements:

Threshold/target/maximum payout levels (e.g., 50%–150% of target shares)
Performance curves that scale payouts based on performance achievement
Multi-year performance periods (typically 3 years)

When PSUs are appropriate:

Executive teams and senior leaders with clear line of sight to strategic metrics
Organizations under strong investor scrutiny or those emphasizing pay-for-performance
Companies seeking to reward outstanding performance and discourage poor performance

The growing use of balanced scorecards—combining financial, operational, and ESG metrics—requires transparent, defensible metric selection. If the company grants performance shares, the methodology for defining and measuring performance must withstand board, auditor, and investor review.

Not all companies can or should use equity; some rely on long-term cash incentives, which we’ll explore next.

Cash-Based Long-Term Incentives

Long-term cash plans are multi-year cash awards tied to performance or service, commonly used by private companies, family owned businesses, and organizations with constrained equity pools.

Common structures:

Long-term performance cash: 3-year performance cycles with payouts based on meeting performance goals (e.g., a net income target or ROIC hurdle)
Deferred cash units: Cash awards that vest over time, paid out after a final vesting period
Phantom equity: Cash awards that mimic the value of company stock without issuing actual shares
Profit-sharing plans with vesting

Advantages:

No share dilution
Easier for employees to understand
Simpler governance for smaller private companies

Tradeoffs:

Less direct alignment with company value or shareholder returns
Potential cash flow impacts at payout (can affect how organizations manage cash flow employees)
Tax timing considerations differ from equity

For some organizations, combining cash LTI with modest equity or profits interests can still promote long term retention and ownership alignment.

Hybrid and Alternative LTI Designs

Many organizations use a portfolio of LTI vehicles—for example, 50% PSUs, 25% RSUs, 25% options—to balance retention, performance leverage, and dilution concerns.

Specialized tools include:

Phantom stock and stock value equivalent plans: Cash awards that track company stock value, used where actual equity is impractical.
Profits interests (for LLCs): Equity-like awards for pass-through entities, requiring careful legal structuring.
ESG-linked performance modifiers: Adjust payouts based on sustainability, diversity, or other non-financial metrics.
Relative TSR overlays: Modify payouts based on company performance vs. peers.
Role-based design: Different LTI mixes for product, sales, and engineering leaders based on their influence on desired company performance.

With this understanding of LTI vehicles, the next section turns to how HR and compensation teams actually design programs step by step—translating strategy into practice.

Designing an Effective LTI Long Term Incentive Plan

Designing an LTI plan is a structured process: align with strategy, define objectives, select vehicles, choose metrics, and size awards using real-time market data. This section moves from “what” LTI vehicles are to “how” HR and comp teams build programs that work.

Clarifying Strategic Objectives and Eligibility

Before structuring the plan, define explicit objectives:

Retention: Retain critical roles through vesting requirements and golden handcuffs.
Performance improvement: Drive specific company performance outcomes (revenue growth, ROIC, TSR).
Ownership culture: Create a sense of ownership and shared success.
Succession planning: Reward and motivate employees on leadership tracks.

Segment the population carefully:

Executives vs. senior leaders vs. high-impact individual contributors
Possible broad-based equity strategies in tech and growth sectors
Document eligibility criteria in the plan document, policy, or governance charter
Reassess eligibility annually as the organization and strategy evolve

Aligning objectives and eligible populations prevents plan bloat and misaligned costs, ensuring LTI spend goes where it drives the most value.

Choosing the Right Mix of LTI Vehicles

Translate strategic objectives into a vehicle mix:

Heavy PSUs: When accountability for company performance is paramount.
RSUs: For retention and stability, especially in volatile markets.
Stock options: For upside leverage, particularly in high-growth companies.

Consider key constraints:

Dilution limits and share pool size
Cash availability (for cash-based plans)
Ownership preferences (equity concentration, voting rights)
Regulatory environment (public companies face different rules than private companies)

Use scenario modeling with Finance to test how different mixes behave under various performance and stock price outcomes before finalizing the plan.

Defining Vesting Schedules and Performance Periods

Cliff vs. graded/ratable vesting:

Cliff vesting: 100% vests at a single point (e.g., after 3 years). Creates a strong retention anchor but higher forfeiture risk for early leavers.
Graded/ratable vesting: Portions vest over time (e.g., 25% per year). Provides more regular reinforcement and lower forfeiture risk.

Typical timeframes:

3–4 years for time-based restricted stock and RSUs
3-year performance cycles for PSUs
Holding requirements for executives post-vesting (to extend alignment with shareholders)

Consider termination provisions at design time:

What happens at retirement, disability, death, or change-in-control?
How are unvested and vested awards treated?

Vesting decisions should reflect culture and workforce norms—faster vesting in high-turnover tech, longer vesting in stable industries.

Selecting and Calibrating Performance Metrics

Common financial metrics:

Total shareholder return (TSR) and relative TSR
Earnings per share (EPS) growth
Revenue growth
Return on invested capital (ROIC) or return on equity (ROE)
Net income target

Operational and strategic metrics:

Customer retention
Safety and quality measures
Strategic milestones (product launches, market expansion)
ESG and sustainability outcomes

Key design decisions:

Absolute vs. relative goals (absolute goals are easier to understand; relative goals reduce the impact of broader economic trends)
Percentile ranking for TSR (e.g., 50th percentile = target payout)
Weighting of multiple metrics (e.g., 60% financial, 40% strategic)
Use of modifiers vs. core metrics

Set credible targets by linking to the strategic plan, historical performance, and external benchmarks. Avoid goals that are either trivially easy or nearly unattainable. Document methodology for setting and evaluating metrics to withstand audit, investor, and employee scrutiny.

Sizing LTI Grants Using Real-Time Market Data

Compensation teams typically determine LTI target values by role level, using benchmark data on total direct compensation (TDC) and pay mix. The risk of using outdated annual salary surveys for LTI sizing is real—especially in volatile markets or high-growth sectors where the labor market shifts faster than traditional survey cycles.

A real-time compensation intelligence platform like SalaryCube provides up-to-date, U.S.-specific TDC benchmarks and equity norms for hybrid and emerging roles—so you’re not making grant decisions based on data that’s already stale.

At a high level, HR teams convert dollar-denominated LTI targets into share or unit counts using current fair market value and internal guidelines. For example, if the target LTI value is $100,000 and the stock’s closing price is $50, the grant would be 2,000 units (subject to internal rounding and policy).

Implementing and Administering LTI Long Term Incentive Plans

Even well-designed LTIs fail if implementation, communication, and ongoing administration are weak or opaque. This section focuses on process, systems, and communication practices that keep LTI plans aligned, compliant, and understandable.

Governance, Documentation, and Compliance

Essential documents include:

Plan document: The legal foundation, defining terms, eligibility, and mechanics.
Award agreements: Individual agreements specifying grant details, vesting, and forfeiture terms.
Grant policies: Internal guidelines for timing, sizing, and approval.
Governance charter: For executive plans overseen by a Board Compensation Committee.

Key U.S. compliance considerations (at a high level):

Securities rules for public companies (SEC filings, insider trading policies)
Section 409A of the Internal Revenue Code for deferred compensation
Tax withholding obligations at vesting or exercise
Accounting recognition under ASC 718

Clear delegation of authority—who can approve what—is essential. While legal counsel must lead on technical compliance, HR/comp teams need enough understanding to manage day-to-day decisions confidently.

Communication Strategies for HR and Compensation Teams

LTI value depends heavily on employee understanding. If employees don’t understand how their awards work, they’ll discount them—or be surprised and dissatisfied at payout.

Core communication goals:

Clarity: Explain mechanics simply.
Transparency: Be open about risks and upside.
Consistency: Align messaging with pay philosophy.

Recommended communication tools:

One-page plan summaries
FAQs covering common questions
Grant calculators to illustrate potential value
Total rewards statements showing LTI as part of overall compensation
Manager talking points for annual grant conversations

Tailor communication depth by audience: high-level strategy for executives, simplified visuals and examples for broader populations. Explain risk and upside clearly—for example, that options can become underwater, or that performance shares pay nothing if goals aren’t met.

Systems, Tools, and Data for Ongoing LTI Management

The typical tech stack includes:

HRIS: Core employee data and eligibility tracking.
Equity administration platform: Grant, vesting, exercise, and settlement tracking.
Financial reporting tools: Cost recognition and dilution analysis.
Compensation intelligence platforms: Market data for sizing and benchmarking.

Tools like SalaryCube’s benchmarking product and Bigfoot Live support annual grant cycle planning, scenario modeling, and pay-for-performance analyses with real-time U.S. salary and TDC data—reducing dependence on consultants and spreadsheet-heavy workflows.

Maintain a centralized, auditable record of grants, vesting, exercises, and cancellations to support Finance, audit, and compliance needs.

Monitoring, Evaluating, and Adjusting the Plan

Outline an annual or bi-annual review cycle to assess plan effectiveness:

Retention outcomes (are key employees staying?)
Performance alignment (do payouts correlate with results?)
Competitiveness (is LTI attracting and retaining talent?)
Affordability (is share or cash usage sustainable?)

Specific diagnostics to run:

Pay-for-performance alignment analyses
Realized vs. grant-date value reviews
Participation and uptake rates by level or demographic group

Consider plan changes when there is sustained underperformance, misalignment with strategy shifts, market practice changes, or investor feedback. Use platforms like SalaryCube to validate proposed adjustments quickly with current market data.

Common LTI Long Term Incentive Challenges and How to Solve Them

This section addresses practical issues HR and comp teams commonly encounter when operating LTI plans, with actionable solutions.

Challenge 1: Misalignment Between LTI Design and Business Strategy

The issue: Plans designed years ago may still reward growth metrics when the business has shifted to margin and cash flow focus, or vice versa.

Solution: Review the strategic plan annually. Adjust metric weights and vehicles to reflect current priorities. Communicate the rationale openly to participants and the Board.

Challenge 2: Over-Reliance on Outdated Market Data

The risk: Using annual survey data in fast-changing markets (tech, healthcare) can lead to over- or under-granting, affecting both competitiveness and cost control.

Solution: Supplement or replace legacy surveys with real-time U.S. data from platforms like SalaryCube. Run annual “sanity checks” on LTI targets vs. current market and turnover data.

Challenge 3: Poor Employee Understanding and Perceived Value

The symptom: Employees heavily discount LTIs because they don’t understand mechanics, timing, or upside—undermining retention and motivation.

Solution: Simplify plan design where possible. Invest in clear visuals and examples. Provide online tools or calculators. Train managers to explain LTI in the context of total rewards.

The issue: Aggressive broad-based equity can exhaust share pools and create shareholder concerns, especially for public companies.

Solution: Plan multi-year share pool usage. Use more full-value awards and cash LTIs where appropriate. Model dilution under different grant strategies with Finance.

Challenge 5: Pay-for-Performance Misalignment

The scenario: Executives earn large LTI payouts despite weak shareholder or business outcomes, creating reputational and governance risk.

Solution: Incorporate robust performance metrics (relative TSR, ROIC, balanced scorecards). Use caps and modifiers. Periodically back-test realized pay vs. performance outcomes.

Organizations that regularly monitor these challenges can maintain credible, sustainable LTI programs that motivate employees and reward employees for the right outcomes.

Conclusion and Next Steps

Long term incentives are powerful levers for employee retention, performance alignment, and ownership culture—when they are strategically designed, grounded in current market data, and clearly communicated. The most effective LTI plans align vehicles, vesting, and metrics with business strategy; are reviewed regularly; and rely on transparent, defensible data to support sizing and governance decisions.

Next steps for HR and compensation teams:

Audit your current LTI plan against your organization’s strategic priorities.
Benchmark LTI targets with real-time data to ensure competitiveness and affordability.
Clarify governance, documentation, and delegation of authority.
Refresh communication materials to improve employee understanding and perceived value.

Related areas to explore:

Pay equity analyses (to ensure LTI is not widening demographic gaps)
Job architecture and leveling (to support consistent eligibility and grant sizing)
FLSA classification impacts on incentive eligibility

If you need faster, real-time U.S. salary and TDC data for LTI sizing and design, watch interactive demos or book a demo with SalaryCube.

Additional Resources for HR and Compensation Teams

This section provides practical tools and references for those looking to deepen their LTI knowledge or improve their workflows.

SalaryCube resources:

Salary Benchmarking Product: TDC and LTI market data
Bigfoot Live: Real-time salary insights
Free Tools: Quick pay calculations

Internal documents to create or refine:

LTI design principles memo
Annual LTI decision calendar
Standardized Board/leadership dashboard for monitoring LTI effectiveness

External resource categories:

Professional associations’ executive compensation guidelines
Proxy statement benchmarking for public companies
Governance best practice reports

If your organization wants real-time, defensible salary and LTI data that HR and compensation teams can actually use in daily decisions, book a demo with SalaryCube.