Long-term incentive plan: Overview, definition, and example
What is a long-term incentive plan?
A long-term incentive plan (LTIP) is a compensation strategy designed to reward employees, executives, or key stakeholders for sustained performance over an extended period. These plans typically offer financial incentives such as stock options, restricted stock units (RSUs), performance-based bonuses, or deferred cash payouts, encouraging long-term commitment and aligning employee interests with the company's success.
For example, a company might grant stock options that vest over five years, meaning employees must stay with the company for that duration to fully benefit from the incentive.
Why is a long-term incentive plan important?
LTIPs are essential for attracting, motivating, and retaining top talent, especially in leadership positions. By tying rewards to long-term performance, companies can foster loyalty and ensure employees work toward sustainable growth rather than short-term gains.
For businesses, long-term incentive plans help align employee goals with shareholder value, encouraging behaviors that drive profitability, market expansion, and innovation over time. They also serve as a tool for succession planning and leadership retention.
Understanding a long-term incentive plan through an example
Imagine a technology company introduces a long-term incentive plan for its senior executives. The plan grants stock options that vest over four years, meaning executives will receive shares gradually, provided they remain with the company. Additionally, the number of shares awarded depends on achieving specific revenue and profitability targets.
In another case, a healthcare company offers RSUs to high-performing employees, with shares vesting over three years. Employees who stay with the company and meet performance milestones receive stock ownership, creating a direct link between long-term contribution and financial rewards.
An example of a long-term incentive plan clause
Here’s how a clause like this might appear in an employment agreement:
“The Employee shall be eligible to participate in the Company’s Long-Term Incentive Plan (‘LTIP’), subject to the terms and conditions of the plan. Incentives may include stock options, restricted stock units, or performance-based awards, which shall vest over a period of [X] years, contingent upon continued employment and achievement of performance milestones as determined by the Company.”
Conclusion
A long-term incentive plan is a strategic compensation tool that rewards employees for sustained performance and loyalty. By offering stock options, RSUs, or performance-based bonuses, companies can align employee interests with long-term growth and shareholder value. Well-structured LTIPs help businesses attract top talent, enhance retention, and drive continuous performance improvement.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.