Long-Term Incentive Plan (LTIP)

What is an LTIP?

A Long-Term Incentive Plan (LTIP) rewards employees—often executives—for meeting performance goals that increase shareholder value. LTIPs align employee incentives with company growth objectives, encourage retention, and focus effort on long-term business outcomes by delaying or phasing compensation over multiple years.

Why companies use LTIPs

• Aligns employee behavior with shareholder interests and strategic goals.
• Encourages retention of key talent through deferred rewards.
• Directs focus toward metrics that drive long-term performance (e.g., EBITDA, revenue growth, total shareholder return).

Common types of LTIPs

1. Retirement plan matching (e.g., employer 401(k) match)
2. Employer contributions are often subject to vesting schedules, motivating employees to remain until they earn full ownership.
3. Stock options
4. Grants the right to buy company stock at a set price after a service period; potential upside if the stock appreciates.
5. Restricted stock / share awards
6. Shares awarded subject to forfeiture if service or performance conditions aren’t met. Typically become fully owned after a vesting schedule.
7. Cash-and-share hybrid awards
8. Payments split between stock and cash (cash can be used to cover tax liabilities).

Vesting schedules

Vesting determines when employees gain ownership of awards or employer contributions. Common structures:
* Cliff vesting: 0% until a set date, then 100% (e.g., none for first three years, fully vested thereafter).
* Graded vesting: ownership increases incrementally (e.g., 20% per year over five years).

Vesting rules are key to retention and affect the value an employee realizes if they leave before full vesting.

How an LTIP works

An LTIP awards compensation now that is paid out or becomes owned over time, contingent on continued employment and/or achievement of performance targets. Because reward realization is delayed or phased, employees have an incentive to stay and focus on long-term results.

LTIP vs. bonus

• Bonus: typically a near-term, one-time payment tied to short-term performance.
• LTIP: designed and structured to deliver rewards over multiple years to promote long-term commitment and performance.

Typical duration

LTIPs commonly distribute awards over three to five years, though specific plans may be shorter or longer depending on goals and industry norms.

Example (illustrative)

A company might adopt a share-based LTIP for senior staff where awards are paid partly in company shares and partly in cash tied to multi-year EBITDA performance. Shares may be non-transferable during a restriction period, and the cash portion may be intended to cover taxes and related costs. Awards vest only after continued service and the satisfaction of performance criteria.

Key takeaways

• LTIPs align employee incentives with long-term shareholder value and strategic objectives.
• They promote retention by deferring or phasing rewards through vesting schedules.
• Common instruments include retirement matching, stock options, and restricted stock.
• Evaluate any LTIP for its vesting terms, performance conditions, payout mix (cash vs. stock), and how it fits your career and financial goals.