What is a long-term incentive plan (LTIP)? Explore the types and benefits

No matter how much a worker loves their job, motivation ebbs and flows. Whether they’re an entry-level employee or a seasoned executive, staying engaged and committed to the daily grind is an ongoing challenge. Evolving technologies, tight deadlines, new workforce expectations—and life outside the office—can make long-term performance goals feel like distant targets.

An attractive salary and benefits catch the attention of talented workers, but regular financial rewards sustain engagement and retention over time. A long-term incentive plan (LTIP) doesn’t just set up a system to recognize employee contributions; it aligns daily workflows with the organization’s strategic objectives while fostering a company culture that values mutual growth and innovation. From cash bonuses to equity compensation and profit sharing, here’s a guide to employee incentive plans to promote growth among your top talent. 

What is a long-term incentive plan (LTIP)?

A long-term incentive plan is a compensation program designed to reward employees, typically executives, for achieving strategic organizational objectives. LTIPs often include company stock options, cash awards, and other equity-based compensation plans. 

These company incentive plans encourage valuable employees to stick with the company long-term and contribute to its sustained growth and success. To qualify for this employee rewards program, employees must hit predefined performance goals within a specified period, typically one to five years or even longer. 

Although incentives are geared toward employees, a cohesive global compensation strategy propels the entire business forward by tying LTIP objectives to the company’s broader growth plan.

Who receives long-term incentives (LTIs)?

Executives and senior management are the most common recipients of LTIs. However, anyone critical to the company’s strategic growth and long-term success is a great candidate for LTIs. Other roles that may qualify include highly specialized positions (e.g., engineers, scientists, or researchers) whose expertise and skills are essential to innovation.

This practice is especially vital in competitive job markets where certain professionals are in high demand and short supply. By tying a portion of compensation to predefined performance goals, LTIPs improve the retention of key players while promoting their commitment to organizational and shareholder interests. 

What are the benefits of long-term incentive plans? 

In business, loyalty is invaluable. Long-term incentive plans are designed to cultivate a healthy relationship between employees and the organization. Here’s how: 

• Strategic alignment: The most apparent benefit of LTIs is aligning employee actions with the organization’s strategic objectives. Linking rewards and executive compensation to long-term growth goals ensures that employees focus on initiatives that drive sustainable growth and profitability. 
• Retention and engagement: Talent retention is crucial for maintaining institutional knowledge and continuity within an organization, which leads to valuable cost savings and operational efficiency. LTIPs encourage employees to stay with the company, fostering a stable work environment where experienced team members can mentor and guide new workers.
• Competitive advantage: A robust total compensation package gives your organization a competitive edge in attracting and retaining skilled professionals. Company incentives demonstrate that a company values and rewards employee contributions beyond a basic salary.
• Company value creation: LTIs give the workforce a vested interest in increasing company value. They ingrain growth objectives into daily operations, guiding key employees to efficiently navigate challenges and seize opportunities.

Long-term incentive plan examples

Your organization doesn’t have to be a public company in the S&P 500 to offer a competitive long-term incentive plan. Various LTIPs exist to suit a wide range of businesses.

Every type of LTIP has advantages and disadvantages. Organizations should carefully analyze their company’s growth potential and long-term goals to select a combination of LTIs that best align with their vision.

Here are four different types of LTIPs to build a global compensation plan that aligns with your growth objectives:

Time-based LTIPs

These plans grant employees restricted stock units (RSU)—stock options that vest over a predetermined period. An RSU vesting period can be tailored to the company’s organizational needs and projected growth, including a fixed or staggered vesting schedule.

RSUs traditionally require recipients to stay with the organization for a certain amount of time before they can sell. Therefore, they provide a great negotiation tactic to keep key employees with the company. Plus, there are no upfront payments, making them a less risky approach than stock options. 

Appreciation-based LTIPs

This type includes incentives like stock appreciation rights (SARs). Workers receive cash or stock based on the increase in the company’s stock price over a set period. Stock appreciation rights directly tie rewards to the company’s value, motivating employees to contribute to shareholder value.

Similar to time-based LTIPs, organizations can customize the vesting period and payout schedule. However, this option can be risky for employees and employers alike. Employee morale may drop if the stock price falls or fails to meet expectations.

Cash-based LTIPs

This is a popular long-term incentive for private companies with complex valuations. Cash bonuses and incentives offer employees immediate and tangible financial rewards for achieving specific organizational or individual performance metrics. However, employers may struggle to closely align cash-based LTIs with shareholder interests and long-term company growth since incentives aren’t explicitly tied to boosting stock prices. 

Performance-based LTIPs

Performance share units (PSUs) are incentives employees receive when they achieve specific performance goals. They may be company stock or cash equivalents that vest once they meet financial targets or strategic milestones. Unmet targets might result in reduced or forfeited payouts, meaning you need well-defined and realistic KPIs and support systems to optimize performance-based LTIPs.

How are LTIPs paid out? 

LTIPs stipulate vesting schedules—specific timeframes or performance metrics an employee must meet before acquiring rewards. Vesting requirements are intended to protect the organization’s interests, ensuring top talent stays with the company and hits specific goals.

Vesting occurs in two primary ways: 

1. Cliff vesting: A worker becomes fully vested in their LTIP awards after a specified period, typically measured in years. They receive the entire allocation of shares or cash at once, contingent upon remaining with the company until the cliff vesting date. 
2. Graded vesting: This method grants incremental shares or cash awards over time, often in equal installments. For example, you might design a four-year vesting schedule with 25% of the award vesting each year. This approach can encourage employee retention over more extended periods, assuming the company’s value increases over time. 

When choosing between cliff and graded vesting, there’s no one-size-fits-all strategy. Organizations should carefully analyze long-term retention goals, industry volatility, and reliable valuation methodology to predict future growth. Likewise, strategies may differ between executives within the organization depending on individual risk tolerance and tenure. 

A flexible, case-by-case approach is a win-win for everyone. It incentivizes employee retention and performance and contributes to the desired organizational goals. 

Reward your top performers

Salary, equity, benefits—a comprehensive total rewards package is the key to building a dream global workforce.

With Oyster’s Total Rewards, you can design a long-term incentive plan that checks off all your boxes. Our global insights, employment intelligence, and comprehensive software are designed to propel your organization forward, no matter where you choose to do business.

About Oyster‍

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.