Long-Term Incentive Plan
A Long Term Incentive Plan (LTIP) is a structured reward system designed to retain and motivate employees by tying their compensation to long-term company goals.
These plans often span over 3–5 years and align employee interests with organizational success.
¿Qué es un plan de incentivos a largo plazo?
Un plan de incentivos a largo plazo (LTIP) es una estructura de compensación diseñada para recompensar a los empleados por alcanzar objetivos estratégicos a largo plazo y crear valor sostenido para la organización durante un periodo prolongado.
Los LTIP se suelen implantar como parte de la estrategia de compensación global de una organización para atraer, retener y motivar a los talentos clave, especialmente a nivel ejecutivo y de alta dirección.
¿Cuáles son las principales características de un plan de incentivos a largo plazo?
Entre las características clave de los planes de incentivos a largo plazo se incluyen:
- Performance-based rewards: LTIPs are often performance-based, meaning that the rewards employees receive are tied to the achievement of specific performance metrics or financial targets set by the organization.
These metrics may include measures such as revenue growth, profitability, shareholder returns, earnings per share (EPS), or total shareholder return (TSR). - Vesting periods: LTIPs typically have vesting periods, during which employees must remain with the company and meet certain eligibility criteria to become entitled to the rewards.
Vesting periods are intended to incentivize employee retention and align employee interests with long-term organizational goals. - Equity-based awards: Many LTIPs include equity-based awards, such as stock options, restricted stock units (RSUs), or performance shares, as a significant component of the overall reward structure.
Equity awards provide employees with a stake in the company's future performance and align their interests with those of shareholders. - Multi-year performance measurement: LTIPs often incorporate multi-year performance measurement periods, typically spanning three to five years or longer. By focusing on long-term performance outcomes, LTIPs encourage employees to make strategic decisions that contribute to sustainable growth and value creation over time.
- Goal setting and performance targets: LTIPs require clear goal setting and performance targets to define what success looks like and how rewards will be earned. These targets are typically established in alignment with the organization's strategic objectives and may be adjusted periodically to reflect changing business conditions.
- Communication and transparency: Effective communication and transparency are essential components of LTIPs to ensure that employees understand the program's objectives, performance metrics, eligibility criteria, and potential rewards.
Clear and consistent communication helps employees stay engaged and motivated to achieve long-term goals. - Risk management and governance: LTIPs require robust risk management and governance mechanisms to mitigate potential risks and ensure that incentive plans are aligned with the organization's risk appetite and values.
This may include oversight from the board of directors, compensation committee, or other governing bodies.
What are the types of long term incentive plans?
There are multiple types of LTIPs, each suited for different organizational goals. Companies may use one or a combination depending on their structure.
- Stock Options: Right to buy company stock at a fixed price in the future
- Restricted Stock Units (RSUs): Shares granted with conditions and vesting
- Performance Shares: Shares awarded based on hitting key goals
- Deferred Bonuses: Cash incentives paid after a defined period
- Phantom Stock: Cash equivalent of stock value, without equity dilution
Why are long term incentive plans important?
LTIPs serve as powerful tools for long-term engagement and succession planning. Here’s why they matter for both employees and organizations:
- Help retain top-performing and high-potential talent
- Align employee goals with company strategy and long-term performance
- Drive consistent high performance and future planning
- Reduce short-term thinking in decision-making
- Support leadership continuity during business transitions
Who is eligible for a long term incentive plan?
Eligibility for LTIPs varies by company, but it’s typically offered to employees in critical or leadership roles. Some companies extend these plans to high performers across levels to foster wider engagement.
- Executives and senior leaders
- Mid-level managers with strategic influence
- High-potential or mission-critical talent
- Employees in revenue-driving or technical roles
When are long term incentive plans paid out?
LTIPs are paid out after the completion of a vesting period, which is typically 3–5 years. The payout depends on meeting predefined goals.
- After the end of a set performance period
- Upon achieving financial or strategic milestones
- On completion of project or tenure-based terms
- At the end of the vesting schedule defined in the agreement
Encuestas sobre el pulso de los empleados:
Se trata de encuestas breves que pueden enviarse con frecuencia para comprobar rápidamente lo que piensan sus empleados sobre un tema. La encuesta consta de menos preguntas (no más de 10) para obtener la información rápidamente. Pueden administrarse a intervalos regulares (mensual/semanal/trimestral).
Reuniones individuales:
Celebrar reuniones periódicas de una hora de duración para mantener una charla informal con cada miembro del equipo es una forma excelente de hacerse una idea real de lo que les pasa. Al tratarse de una conversación segura y privada, te ayuda a obtener mejores detalles sobre un asunto.
eNPS:
eNPS (employee Net Promoter score) es una de las formas más sencillas y eficaces de evaluar la opinión de sus empleados sobre su empresa. Incluye una pregunta intrigante que mide la lealtad. Un ejemplo de preguntas de eNPS son ¿Qué probabilidades hay de que recomiende nuestra empresa a otras personas? Los empleados responden a la encuesta eNPS en una escala del 1 al 10, donde 10 significa que es "muy probable" que recomienden la empresa y 1 significa que es "muy improbable" que la recomienden.
En función de las respuestas, los empleados pueden clasificarse en tres categorías diferentes:
- Promotores
Empleados que han respondido positivamente o están de acuerdo. - Detractores
Empleados que han reaccionado negativamente o no están de acuerdo. - Pasivos
Empleados que se han mantenido neutrales con sus respuestas.
How do long term incentive plans work?
Long term incentive plans work by granting employees rewards that vest over time, conditional on their performance and retention. The value of the incentive typically depends on the company’s success and can include equity or cash.
- Employees are granted options or shares at the start of the plan
- A vesting period is defined (e.g., 3–5 years)
- Performance metrics (e.g., revenue growth, EPS) are set
- If goals are met and the employee stays, the reward is granted
- Rewards may come as cash, stock, or profit-sharing
How to design a long term incentive plan?
Designing an LTIP requires strategic planning, financial modeling, and a deep understanding of employee behavior and organizational needs.
- Define the purpose—retention, performance, or alignment
- Choose the right type of LTIP (stock, bonus, RSUs, etc.)
- Set clear, measurable long-term performance goals
- Establish a vesting schedule that encourages retention
- Ensure legal and tax compliance in every jurisdiction
- Communicate the plan transparently to employees
How to account for long term incentive plans?
Accounting for LTIPs involves estimating the cost of the plan and recording it over the vesting period. This ensures the expense is matched to employee service.
- Recognize compensation expense over the service period
- Use fair value methods for stock-based incentives
- Update estimates periodically for changes in performance or attrition
- Record liabilities for cash-settled LTIPs
- Disclose the LTIP details in financial statements under relevant accounting standards (e.g., IFRS or GAAP)
¿Con qué frecuencia se suelen pagar los planes de incentivos a largo plazo?
Normalmente, los pagos del LTIP se realizan de acuerdo con uno de los siguientes calendarios:
- Vesting periods: Many LTIPs have vesting periods during which employees must remain with the company and meet certain eligibility criteria to become entitled to the rewards.
Vesting periods can vary in length but commonly range from three to five years or longer. Once the vesting period is complete, employees become eligible to receive their LTIP payouts. - Performance measurement periods: LTIP payouts may be based on the achievement of specific performance goals or targets over a predetermined performance measurement period.
Performance measurement periods typically align with the company's fiscal year or other reporting periods and may span multiple years. Payouts are made at the end of the performance measurement period based on the extent to which performance goals are met. - Annual or periodic payouts: Some LTIPs provide for annual or periodic payouts based on the company's performance or other predetermined criteria.
For example, cash incentive plans or performance share plans may provide for annual payouts based on annual performance targets or financial metrics. These payouts are typically made at the end of each performance period or fiscal year. - Milestone-based payouts: In certain cases, LTIP payouts may be tied to the achievement of specific milestones or events, such as the completion of a strategic initiative, a merger or acquisition, or the attainment of a certain market valuation.
Payouts are made upon the successful completion of the milestone or event as outlined in the LTIP. - Lump-sum or installment payments: LTIP payouts may be made in a lump sum or in installments, depending on the terms of the plan and the preferences of the company.
Lump-sum payments provide employees with the full value of their LTIP awards at once, while installment payments distribute the value of the awards over multiple periods.
¿Cómo funciona un plan de incentivos a largo plazo?
Así es como funciona un LTIP típico:
- Fijación de metas: La organización establece metas u objetivos de rendimiento a largo plazo que se ajustan a sus prioridades estratégicas y a los intereses de los accionistas. Estas metas pueden incluir parámetros financieros (por ejemplo, crecimiento de los ingresos, rentabilidad, beneficios por acción), objetivos operativos (por ejemplo, cuota de mercado, satisfacción del cliente) u otros objetivos estratégicos.
- Designing the plan: The organization designs the LTIP, including the types of incentives to be offered (e.g., stock options, restricted stock units, performance shares), eligibility criteria, performance measurement periods, vesting schedules, and payout structures.
The plan is typically developed in consultation with the board of directors, compensation committee, or other relevant stakeholders. - Comunicación y puesta en marcha: La organización comunica los detalles del LTIP a los empleados con derecho a participar, incluidos los objetivos, los parámetros de rendimiento, los criterios de elegibilidad, las posibles recompensas y el calendario de participación. Una comunicación clara y transparente es esencial para garantizar que los empleados entienden los objetivos del programa y cómo pueden obtener recompensas a través de su rendimiento.
- Performance measurement: Throughout the performance measurement period, the organization tracks and evaluates progress toward the established goals or objectives.
Performance metrics are monitored regularly to assess performance against targets and determine whether employees are on track to earn rewards under the LTIP. - Vesting and eligibility: Employees must meet certain eligibility criteria and remain with the organization for the duration of the vesting period to become entitled to the rewards offered under the LTIP.
Vesting schedules may vary but often require employees to fulfill specific tenure requirements or performance conditions before becoming eligible to receive rewards. - Reward calculation: At the end of the performance measurement period, the organization calculates the rewards earned by eligible employees based on their performance against the established goals or objectives.
Rewards may be calculated based on predetermined formulas, performance scores, or other objective criteria outlined in the LTIP. - Distribución de las recompensas: Una vez calculadas las recompensas, la organización las distribuye a los empleados que reúnen los requisitos de acuerdo con las condiciones del LTIP. Las recompensas pueden pagarse en forma de bonificaciones en efectivo, acciones de la empresa u otros premios basados en acciones, dependiendo de la estructura del plan y de las preferencias de la organización.
- Evaluation and review: After the completion of each performance measurement period, the organization evaluates the effectiveness of the LTIP in driving performance, achieving strategic objectives, and aligning employee interests with shareholder interests.
Feedback from participants and stakeholders may be used to inform adjustments or refinements to the LTIP for future periods.
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