What is a long-term incentive plan (LTIP)?
A long-term incentive plan (LTIP or LTI plan) is a compensation program that offers your employees incentives beyond their basic salary for achieving predetermined goals. The payment is deferred and usually spreads over 3-5 years to stimulate ongoing progress.
An LTI plan comes in all sorts of shapes and sizes – here’s a simple guide to help you find the best long-term incentive plan design that suits your company.
Who is eligible to get LTIPs?
LTIPs are often reserved for executive-level and above whether it’s a private or public company, but many companies are starting to grant them to employees below the executive level. According to the Pearl Meyer Report 2024, approximately 53% of public company respondents make some grants below the vice president (VP) level.
However, because of stock liquidity, private companies’ long-term award opportunities for both executives and broad-based employees are often used less than in public companies.
Why do companies use LTIPs?
LTIPs can be a win-win strategy for both employers and employees. 97% of public companies and 68% of private companies offer LTIPs to their senior executives, according to the same study.
– Focus on long-term profits/benefits
LTIPs can align your company’s interests with the interests of your employees over a long period. They’re not only trying to hit targets for this year, but also moving the company forward to sustain its growth in the long run.
– Help attract, reward and retain talent
With LTIPs, your employees have the opportunity to earn additional financial rewards to share in the wealth of a company, ideal for attracting skilled people.
It’s also more likely for employees to stick around longer as their long-term pay holds them accountable for implementing it over the next couple of years.
– Save time and money on hiring senior employees
When a business replaces a salaried employee, it costs six to nine months’ salary, on average, to train their replacement. This is more of an issue these days when most employees only remain with a company for an average of two years.
At J.P. Morgan Workplace Solutions, our equity management solutions can help you to reduce the LTIP setup and administration burden – from implementation to granting, task tracking, trading, compliance, tax, participant experience and everything in between.
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Different types of long-term incentive plans
There are essentially four different types of long-term incentive plans.
| Appreciation-based award | Time-based award | Performance-based award | Cash-based award | |
|---|---|---|---|---|
| Meaning | The amount depends on how much the company’s value increases over time. | Only available to employees after a certain amount of time in the company | Only available to employees when certain performance and service conditions have been met | Given to employees as a cash bonus |
| Examples | Stock options | Restricted stock units (RSUs) | Performance shares/units | Performance -based cash |
| LTI prevalence among executives in public companies* | Options: 33% | RSUs: 85% | Performance shares/units: 76% | N/A |
| LTI prevalence among executives in private companies* | Options: 25% | RSUs: 10% | Performance shares/units: 8% | Performance cash: 46% |
Which one is right for you?
Depending on your industry and your jurisdiction, your company might be better suited to one of these over the others, so it’s important to understand the positives and negatives of each one.
Appreciation-based awards (e.g. stock options)
✓ PRO: Appreciation-based awards can have monetary upsides for employees in the case of company stock price appreciation, particularly in startups and growing companies.
✓ PRO: This type of award is also very flexible. You can decide when and how often your employees receive the awards.
✓ PRO: Employees may qualify for preferential tax treatment.
✖ CON: Employees, however, need to pay for their stock options at the pre-set price (exercise price) when they decide to exercise (i.e. purchase) their options.
✖ CON: There is a risk with these awards, e.g. they can potentially be worthless should their value drop below the exercise price (i.e. underwater stock option)
Time-based awards (e.g. RSUs)
✓ PRO: In the case of an RSU – a full value award, employees almost always will receive some positive value as long as the shares don’t go below zero. So, RSUs are considered less risky than stock options.
✓ PRO: RSUs are usually granted for free, so employees don’t need to pay for the grant.
✓ PRO: You can customize the process of making them available to employees, e.g. when and how often your employees receive the awards.
✖ CON: Employees cannot control the timing of taxation with RSUs as ordinary income tax is due once they vest. But with stock options, tax is only due when they decide to exercise stock options.
Performance-based awards
✓ PRO: To receive their bonus, the employees need to hit certain targets. It’s easy to see why this is an enticing plan for companies.
✓ PRO: Performance shares help align the goals of executives and other employees with those of shareholders.
✖ CON: If the targets are not set correctly or are too hard to achieve, the employees could lose morale as they don’t receive anything.
Cash-based awards
✓ PRO: Cash is the most reliable form of bonus without ownership dilution issues.
✓ PRO: It is a popular LTI award for private companies as they have little liquidity and their share valuation is often more complicated.
✖ CON: It’s best to avoid these if cash flow is important to your company.
✖ CON: Employees receiving cash may not feel as invested in the company as those receiving stock.
When and how are LTIPs paid out?
Vesting determines when and how an LTI award is paid out.
Vesting means the waiting period before receiving 100% of the LTI ownership.
There are two common ways to vest your shares – cliff vesting and ratable vesting. Cliff vesting is a process where a participant receives full award ownership on a given date while ratable/graded vesting allows a participant to gain award ownership in intervals.
| Full Year(s) of Service | 3-Year Cliff Vesting | 6-Year Graded Vesting |
|---|---|---|
| 1 | 0% | 0% |
| 2 | 0% | 20% |
| 3 | 100% | 40% |
| 4 | Nil | 60% |
| 5 | Nil | 80% |
| 6 | Nil | 100% |
A real-life example of a long-term incentive plan
Headquartered in San Francisco, USA, Uber is a ride-hailing tech company that adopts long-term incentive plans to satisfy multiple business goals. They include: 1/ encouraging equity ownership and executive retention, 2/ reinforcing the need for long-term sustained financial performance, and 3/ aligning the interests of executives and stockholders.
Their long-term executive equity incentives come in the form of stock options (CEO only), RSUs, and performance-RSUs:
- Options: Reserved for the CEO, they vest 25% per year over four years, providing additional retentive value through annual cliff vesting.
- RSUs: Allocated to both the CEO and other NEOs, they vest over four years.
- Performance-RSUs: While previously only granted to certain NEOs, they are now granted to all of Uber’s NEOs to drive the achievement of key financial, operational, and strategic objectives. They vest based on target achievement at the end of the three-year performance period.
Overall, Uber’s plan is quite similar to the trends observed in the Pearl Meyer 2024 report where RSU and performance shares/units are commonly used in public companies.
To learn more about how to develop an LTIP to best suit your business, head over to our guide to ”Create an LTIP step by step” or LTIP best practices.
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We spend all day coming up with ways to help our clients manage their LTIPs. It’s what has made us an award-winning equity management company for over 15 years. We can take you through the launch of your plan, from the right LTI awards to the right vesting, plan rules and a whole lot more.
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FAQs about a long-term incentive plan
What is a long-term incentive plan?
A long-term incentive plan (LTIP or LTI plan) is a compensation program that offers your employees incentives beyond their basic salary for achieving predetermined goals. The payment is deferred and usually spreads over 3-5 years to stimulate ongoing progress.
Having an LTI plan can focus employees on targets to help you reach specific goals and propel your company forward to success.
Who is eligible to get LTIPs?
LTIPs are often reserved for executive-level and above whether it’s a private or public company, but many companies have begun to grant them to employees below the executive level. According to a recent study, approximately 53% of public company respondents make some grants below the vice president (VP) level.
Why do companies use LTIPs?
LTIPs have the potential to be a win-win deferred compensation strategy for both employers and employees. Some benefits are 1/ Focus on long-term profits/benefits, 2/ Encourage employees to remain with the company, 3/ Save time and money on hiring senior employees.
How many types of long-term incentive plans?
There are essentially four different types of long-term incentive plans – Appreciation-based, Time-based, Performance-based and Cash-based awards.
All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
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Please Note: This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
