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A Guide to Long-Term Incentive Plans (LTIPs) for Senior Executives

by | Feb 9, 2024 | Employment Law |

An LTIP, or Long-Term Incentive Plan, is a type of executive compensation package that is designed to reward senior executives for their long-term performance and commitment to the company and to encourage them to stay committed to the employer. Unlike other forms of compensation, such as base salary or annual bonuses, LTIPs are focused on long-term goals and are usually tied to the company’s stock price. In this guide, we will take a closer look at LTIPs and how they work, specifically for senior executives.

What is an LTIP?

An LTIP is a type of incentive plan that offers long-term rewards to executives based on the performance of the company’s stock. This means that as the stock price rises, so does the value of the executive’s compensation. The goal of an LTIP is to align the interests of the executive with those of the company’s shareholders, as both parties benefit from a rise in stock price.  The LTIP usually vests over a period of years, encouraging the employee to stay with the company until the full LTIP has vested.  Often annual performance rewards may be granted as LTIPs which vest over the next 3-5 years.

Key takeaway: LTIPs are designed to reward long-term performance and align the interests of the executive with those of shareholders.

Types of LTIPs

There are several types of LTIPs that companies may offer to their senior executives. The most common ones include:

  • Stock Options: This type of LTIP allows executives to purchase company stock at a predetermined price, known as the “strike price,” in the future. If the stock price rises above the strike price, executives can exercise their vested options and sell the stock for a profit.
  • Performance Shares: With performance shares, executives receive actual company stock based on certain performance criteria, such as revenue growth or earnings per share.
  • Restricted Stock Units (RSUs): RSUs are similar to performance shares, but executives do not receive the stock until a vesting period has passed. This means that they cannot sell or transfer the stock until a specific date or milestone is reached and may be subject to certain black out periods.

Key takeaway: The three most common types of LTIPs are stock options, performance shares, and restricted stock units (RSUs).

Benefits of LTIPs for Senior Executives

LTIPs offer several benefits to senior executives, including:

  • Alignment of Interests: As mentioned earlier, LTIPs align the interests of the executive with those of shareholders. This encourages executives to make decisions that are in the best interest of the company and its long-term success and to remain committed to the company for a long period. This has the potential to increase your satisfaction with your job.
  • Incentives for Special Skills: Senior executives with special skills or best-in-class talent can receive LTIP benefits
  • Tax Benefits: Depending on the structure of the LTIP, there may be tax benefits for both the executive and the company.

Key takeaway: LTIPs offer several benefits to senior executives, including alignment of interests to raise your job satisfaction, incentives for special skills, and potential tax benefits.

When Do Workers Earn Long-Term Incentive Plan Benefits?

Workers earn LTIP benefits at different times depending on the structure of the plan. For stock options, executives can only exercise their options once they have vested, which means they have met certain conditions or milestones set by the company. Performance shares and RSUs also typically have a vesting period before executives can receive the stock.

Key takeaway: The timing of when workers earn LTIP benefits depends on the structure of the plan.

Considerations for Employees Considering Changing Employment

When considering a change in employment, employees should consider the following:

  • Take a look at your LTIP plan to ensure you thoroughly understand its terms and conditions.
  • Make sure you know how much of the LTIP is vested – what remains unvested will most likely be lost.
  • Consider whether there are any grounds to negotiate a buyout/payout of the unvested LTIP.

Key takeaway: When contemplating a job switch, employees must review their LTIP plan, understand its terms, assess vested portions to avoid potential losses, and explore negotiation avenues for a buyout or payout of unvested LTIP.

Consulting an Executive Compensation Attorney

The  Hamilton Law Firm LLC, has knowledgeable attorneys who can assist with evaluating your options under the LTIP as you decide your next steps.  You have worked hard for the LTIP grant and should minimize the loss of that benefit. Call Hamilton Law Firm today to schedule a consultation to discuss effectively exiting from a company without losing your full LTIP benefit.

The Bottom Line

LTIPs allow senior executives to reap the benefits of additional financial assets including stock options and performance shares. If you are a senior executive considering an LTIP as part of your compensation package, it is important to consult with an experienced executive compensation lawyer to ensure that you fully understand the terms and potential tax implications. And, importantly, if you are a senior executive who could lose their full LTIP benefit when exiting the company, you’ll need to have an executive compensation lawyer to ensure an effective strategy.