What is a long-term incentive plan?
A long-term incentive plan (LTIP) is a company policy that rewards employees for achieving specific objectives that result in increased value for shareholders.
In a typical LTIP, the employee, usually a manager, must meet various conditions or requirements. In some forms of LTIPs, beneficiaries receive special capped options in addition to share allocations.
Understanding the long-term incentive plan (RILT)
A long-term incentive plan (LTIP), although it is employee-oriented, is really a function of the business itself that aims for long-term growth. When the objectives of a company’s growth plan match those of the company’s LTIP, key employees know which performance factors to focus on to improve the business and earn more personal compensation.
The incentive plan keeps the best talent in a highly competitive work environment while the business continues to evolve in predetermined and potentially lucrative directions.
Types of RILT
One type of LTIP is the 401 (k) pension plan. When a business is a percentage of an employee’s salary, employees are more likely to work for the business until retirement.
The company generally has an acquisition schedule that determines the value of contributions to the retirement account that a worker can take when he leaves the company. A company generally keeps part of its contributions during the first five years of employment of a worker. Once an employee is fully invested, he has all of his pension contributions in the future.
Another type of RILT is stock options. After a specified period of employment, workers may be able to buy company shares at a discount while the employer pays the balance. The seniority of the worker in the organization increases with the percentage of shares held.
In other cases, the company may offer restricted stocks to employees. For example, the employee may have to return gifted shares if he resigns within three years of receipt. For each year to come, the worker may be entitled to an additional 25% of the stock offered. After five years of receiving restricted shares, the employee is generally fully invested.
Example of a RILT
In June 2020, the board of directors of Konecranes PLC agreed on a new share-based LTIP for key employees. The plan offered competitive rewards based on earning and accumulating company shares.
The RILT had a discretionary period in calendar year 2020. The potential rewards were based on employment or continuous services and on the adjusted profit of the Konecranes Group before interest, taxes, depreciation and amortization (EBITDA). The rewards were to be paid partly in Konecranes shares and partly in cash at the end of August 2020. These cash were to be used to cover taxes and related costs.
The shares paid under the plan could not be transferred during the restriction period, starting at the time of payment of the reward and ending on December 31, 2020.