Long-term incentive awards: Overview, definition, and example
What are long-term incentive awards?
Long-term incentive awards are compensation or benefits provided to employees, typically executives or key personnel, to reward performance over an extended period, usually more than one year. These awards are designed to align employees' interests with the long-term success of the company by motivating them to focus on goals such as company growth, profitability, and shareholder value. Common types of long-term incentive awards include stock options, restricted stock, performance shares, and cash bonuses linked to long-term company performance.
For example, a company may offer its CEO stock options that can be exercised after three years, contingent on the company meeting certain performance targets.
Why are long-term incentive awards important?
Long-term incentive awards are important because they help attract, retain, and motivate top talent by offering rewards tied to the company’s future performance. These incentives encourage employees to remain with the company for a longer period and focus on achieving long-term goals, rather than just short-term results. By offering long-term incentives, companies can improve their overall performance, reduce turnover, and create a stronger connection between employee success and company success.
For businesses, long-term incentive awards are a key part of executive compensation strategies, helping ensure that leadership is driven to work in the best interests of the company's future.
Understanding long-term incentive awards through an example
Imagine a tech company, InnovateTech, offers a long-term incentive award in the form of restricted stock to its executives. The stock is granted to the executives with a vesting schedule over four years, meaning that they will only fully own the stock after staying with the company for the entire period. This encourages the executives to remain with the company and work toward long-term goals like increasing the company's market share and stock price, aligning their interests with those of the shareholders.
In another example, a company may grant performance shares to an employee, which are contingent upon the company meeting specific revenue or profitability targets over a five-year period. If the targets are met, the employee receives a significant payout, incentivizing them to contribute to the company’s long-term success.
An example of a long-term incentive awards clause
Here’s how a clause like this might appear in a contract:
“The Company agrees to grant the Employee long-term incentive awards in the form of stock options, which will vest over a period of three years, contingent upon the Company achieving specific performance targets as outlined in the Company’s incentive plan.”
Conclusion
Long-term incentive awards are a powerful tool for motivating employees and aligning their efforts with the long-term success of the company. By offering compensation linked to the company's performance, businesses can encourage their top talent to remain with the company and focus on sustainable growth. For employees, these incentives provide a clear financial reward for contributing to the company’s future success.
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.