Table of Contents
- What Is a Long-Term Incentive Plan?
- How Long-Term Incentive Plans Benefit Companies and Employees
- Popular Types of Long-Term Incentive Plans
- Real-World Example of a Long-Term Incentive Plan
- How Does an LTIP Work?
- Is LTIP the Same as a Bonus?
- How Long Does an LTIP Last?
- Key Takeaways on Long-Term Incentive Plans
What Is a Long-Term Incentive Plan?
I'm here to explain what a long-term incentive plan, or LTIP, really is. It's a system that rewards you as an employee for hitting goals that boost shareholder value. If you're an executive, you typically need to meet specific conditions to qualify. In some LTIPs, you might get special capped options along with stock awards.
How Long-Term Incentive Plans Benefit Companies and Employees
You should know that while LTIPs are aimed at employees like you, they're fundamentally about the business pushing for long-term growth. When the company's growth goals match up with the LTIP, you as an employee can clearly see which areas to focus on to improve the business and earn your compensation. This setup helps keep top talent in a competitive job market as the company evolves.
Popular Types of Long-Term Incentive Plans
One common type is the 401(k) retirement plan. If your employer matches a percentage of your paycheck into the plan, you're more likely to stick around until retirement. The company might use a vesting schedule to determine how much of those contributions you can take if you leave.
In vesting, the company often holds back part of its contributions during your first five years. Once you're fully vested, you own all future contributions to your retirement plan. There are two main types: cliff vesting and graded vesting. With cliff vesting, you might have 0% vesting for the first three years, then jump to 100%. Graded vesting could mean 0% after one year, 20% after two, 40% after three, 60% after four, 80% after five, and 100% after six years.
Stock options are another LTIP type. After a certain period of employment, you can buy company stock at a discount, with the employer covering the rest. Your seniority grows with the shares you own. Companies might also offer restricted stock, which you have to give back if you leave within three years. Each year after that, you gain rights to 25% more, and after five years, you're usually fully vested.
Real-World Example of a Long-Term Incentive Plan
Take Konecranes PLC as an example. In June 2016, their board approved a share-based LTIP for key employees. It provided competitive rewards through earning and accumulating company shares. The plan had a discretionary period covering the 2016 calendar year, with rewards based on continued employment and the group's adjusted EBITDA. Payments were made partly in shares and partly in cash by August 2017, with the cash covering taxes and costs. You couldn't transfer those shares during a restriction period ending December 31, 2018.
How Does an LTIP Work?
An LTIP works by earning compensation now but paying it out over time. This delay acts like a carrot to keep you with the company longer than you might otherwise stay. As time goes on, you reap the rewards.
Is LTIP the Same as a Bonus?
No, an LTIP isn't the same as a bonus. A bonus is typically a one-time payout, while an LTIP is distributed over time by design.
How Long Does an LTIP Last?
To motivate you effectively, an LTIP usually spreads awards over three to five years.
Key Takeaways on Long-Term Incentive Plans
LTIPs align your interests as an employee with the business's, promoting long-term growth and keeping top talent. They help the company by encouraging you to focus on performance that boosts shareholder value. If you're offered an LTIP, review the details like vesting schedules carefully and weigh the trade-offs to decide wisely.
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