Long-Term Incentive Plan (LTIP) Definition and Types

What Is a Long-Term Incentive Plan?

A long-term incentive plan (LTIP) rewards employees for reaching specific goals that increase shareholder value.

In a typical LTIP, the employee must fulfill various conditions. Some LTIPs also include capped options alongside stock awards.

Understanding Long-Term Incentive Plan (LTIP)

A long-term incentive plan (LTIP) is a function of the business striving for long-term growth. When the company’s growth plan aligns with the LTIP, key employees know which performance factors to focus on to improve the business and increase their compensation.

The LTIP helps retain top talent in a competitive work environment as the business evolves in predetermined directions.

Types of LTIPs

A 401(k) retirement plan is one type of LTIP. When a business matches a percentage of an employee’s paycheck, it encourages employee loyalty.

The business has a vesting schedule to determine the value of retirement account contributions. Contributions may be retained over the first five years of employment. Once fully vested, the employee owns all of their retirement plan contributions.

Another type of LTIP is stock options. After a certain period of employment, employees can purchase company stock at a discount, with the employer covering the remaining cost. Seniority in the organization increases with the percentage of shares owned.

In some cases, businesses provide restricted stock to employees. For example, if an employee resigns within three years of receiving gifted stock, they may have to surrender it. Each subsequent year grants the worker additional rights to 25% of the gifted stock. After five years, the employee is usually fully vested.

Example of an LTIP

In June 2016, Konecranes PLC’s board of directors implemented a share-based LTIP for key employees. The plan rewarded earning and accumulating shares of the company.

The LTIP had a discretionary period in 2016, with rewards based on employment/service and Konecranes Group’s adjusted EBITDA. Rewards were to be paid in Konecranes shares and cash by August 2017 to cover taxes and related costs.

Shares received under the plan were subject to a restriction period, which began when the reward was paid and ended on Dec. 31, 2018.