Long-term incentive compensation: Overview, definition, and example
What is long-term incentive compensation?
Long-term incentive compensation (LTIC) refers to a form of employee compensation that is designed to reward employees for their sustained contributions to a company over an extended period. Typically, these incentives are tied to the company's long-term performance or the employee’s continued service and are structured to encourage employees to stay with the company and work toward its long-term goals. LTIC can take various forms, including stock options, restricted stock, performance shares, or retirement benefits, and it is often linked to achieving specific performance metrics, such as revenue growth, stock price increases, or profit targets.
In simpler terms, long-term incentive compensation is pay or benefits offered to employees as a reward for their efforts over a long period, usually aiming to align their interests with the company's long-term success.
Why is long-term incentive compensation important?
Long-term incentive compensation is important because it helps businesses retain key employees and motivate them to focus on the long-term success of the company rather than short-term goals. By offering employees the opportunity to benefit from the company's growth and success, LTIC fosters loyalty, reduces turnover, and encourages employees to invest in the company’s long-term objectives.
For companies, LTIC can be an effective tool for attracting top talent, aligning employees’ incentives with shareholder value, and ensuring that employees are motivated to contribute to the company’s future success. For employees, LTIC provides an opportunity to earn significant rewards if the company performs well over time, creating a sense of ownership and investment in the company's success.
Understanding long-term incentive compensation through an example
Imagine a technology company that offers its senior executives long-term incentive compensation in the form of stock options. These stock options allow the executives to purchase company stock at a set price after a certain period (vesting period) of continued service. The stock options are structured to become valuable only if the company’s stock price increases over time, aligning the executives' financial interests with the company's long-term growth.
In another example, a manufacturing company offers a group of its employees performance shares, which are tied to the company’s long-term profitability and growth. If the company meets specific financial targets over the next five years, the employees will receive a set number of shares, providing them with a significant financial reward. This type of incentive encourages the employees to contribute to the company’s long-term success and goals.
Example of a long-term incentive compensation clause
Here’s how a long-term incentive compensation clause might appear in an employment agreement or compensation plan:
"The Employee shall be eligible to participate in the Company’s Long-Term Incentive Compensation Plan, which provides stock options, performance shares, or other equity-based awards based on the Employee's continued service with the Company and the achievement of long-term performance goals, as determined by the Board of Directors. The vesting of any awards shall occur over a [X]-year period, subject to the Employee’s continued employment and the achievement of performance targets set by the Company."
Conclusion
Long-term incentive compensation plays a crucial role in attracting, retaining, and motivating employees by aligning their interests with the company’s long-term success. It encourages employees to focus on the company’s future performance and creates a sense of ownership and reward based on the company’s sustained growth and 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.