Understanding Long-term Incentive Plans

When workers are happy, they are more likely to perform better at work. For this reason, companies create incentive schemes to reward their workers for their good work. In this way the worker will feel that the company recognizes their efforts. This can also help attract and keep workers.

Through the years, there have been many ways that companies reward their workers. This can include monetary and non-monetary incentives. This can be big or small depending on the company’s budget. But one thing for sure is that it has a major impact on workers’ morale.

What are Long-term Incentive Plans (LTIPs)?

Companies award incentives to their workers for various reasons. This is to motivate them to perform at their best. This often includes cash bonuses and other financial rewards. In addition, firms can combine several types of incentives for their workers.

Aside from monetary and non-monetary, incentives can also be in short-term or long-term. Short-term incentives take a wide range of forms. Firms usually reward these for achieving targets within the current working year.

On the other hand, the purpose of giving long-term incentives gears toward long-term business growth. Companies give these to workers for reaching targets that lead to the increase of shareholder value.

Advantages of Long-term Incentive Plans

Companies prefer using LTIPs due to their long-term profits and benefits. These are more sustainable for workers and firms. In addition, firms that use LTIPs can align their goals with their workers’ goals. This approach urges them to be better at work.

Using LTIPs can also help keep workers in the company longer. This is because with LTIPs, workers can earn over a period. At the same time, firms can keep them longer and save money for reducing the need to hire and train new workers.

Types of Long-term Incentive Plans

Like short-term investment plans, LTIPs come in various forms. This can include financial rewards. Some of the examples of LTIPs are equity plans based on stocks and equity plans based on stock value.

Equity Plan Based on Stocks

The type of equity plans based on stocks are as follows:

1. Stock Options

Experts also refer to this as Employee Stock Options or ESO. Instead of giving shares directly to workers, firms offer this type of LTIP. Companies allow workers to buy shares of stocks at a set price after a certain period of employment. These usually come in the form of standard call options.

If stock prices rise, workers can opt to sell their stock options. In doing so, they can profit from the difference between the initial stock price and the market price after selling.

2. Stock Grants or Stock Rewards

These refer to unregistered shares that firms offer to their executives and directors. This type of LTIP usually includes a vesting period that can last for several years. This ensures the worker to stay until a company meets a certain milestone.

3. Performance Shares

This type of LTIP where the worker receives shares instead of buying them. But as the term indicates, companies reward these shares depending on how a worker meets a pre-set goal.

Equity Plan Based on Stock Value

On the other hand, there are also several types of equity plans based on stock value.

1. Stock Appreciation Rights or SRAs

This is a type of LTIP that relates to a company’s stock price for a certain period. As the name implies, SRAs allow workers to receive the monetary value of the appreciation of the company’s stocks.

With this LTIP, workers do not need to pay for the stock’s exercise price. They usually receive the amount of the increase in cash.

2. Phantom Shares

Experts refer to these as “Shadow” stocks. This type of LTIP pays a cash reward to a worker. This is equal to the dollar value of a per-set number of shares. Companies do this without granting workers any actual company stock.

Firms usually track this cash award in the form of hypothetical units. These units mimic the price of the stock. Companies usually give this LTIP to key workers and senior executives.

These come in two forms, appreciation only and full value. Companies use this type of LTIP due to its flexibility.

Keeping workers happy is an important matter that companies must always consider. While offering competitive compensation may be enough for some, others may look for more. This is where Long-term Incentive Plans play a key role. These can help motivate workers and keep them in the company longer.