Long Term Incentive Plans (LTIPs) are a great way to reward employees who have invested their time and effort into a business, while also promoting the success of the company itself. This article will look at LTIPs and how they can be used to reward long-term performance within business and in turn, retain key employees.
With business competition at an all-time high, the need to effectively retain competent senior employees has never been so important. Long Term Incentive Plans (LTIPs) are a great way to reward employees who have invested their time and effort into a business, while also promoting the success of the company itself. This article will look at LTIPs and how they can be used to reward long-term performance within business and in turn, retain key employees.
What is an LTIP?
A Long-Term Incentive Plan is an employee incentive arrangement that rewards employees for their performance over a specified period, typically of more than one year. This can take several forms, but LTIPs typically have the following attributes:
- they are normally offered to senior executives within the company;
- the reward usually takes the form of free shares (however it can also be share options or cash);
- the reward is only paid out when a performance requirement is met, this is normally measured over a period of three to five years; and
- they are more widely used in public companies as they have readier access to a market on which to sell shares (when compared to private companies).
Who can take part?
LTIPs are primarily focused on senior executives due to their influence in the overall growth and success of the company. Non-executive directors and external consultants are generally prohibited from taking part as this would remove the 'employees' share scheme' status, as per section 1166 of the Companies Act 2006. Removing this status would have an impact on the specific tax advantages and exemptions that 'employees' share schemes' benefit from.
Types of LTIPs
There are several distinct types of LTIPs available to companies but some of the most popular types are:
- Nil cost options – employees can call for free shares to be given to them when certain performance conditions have been met. The employee can choose to acquire these shares at a later stage.
- Conditional share awards – employees are given free shares when performance conditions are met, however, these shares vest immediately on the condition being met.
- Phantom share awards – a right to receive a cash bonus equivalent to the value of shares. These are usually used in circumstances when shares cannot be delivered e.g. for an employee working abroad.
Benefits for the Company
As alluded to, LTIPs are beneficial to companies as they help reward and retain long term employees. They also help align the interests of senior executives with shareholders of the company, which helps create a harmonious relationship between both parties. This also helps employees focus not only on their own success but also the company as a whole, as they have a personal stake in the wellbeing of the business.
It's important to note that LTIPs normally have clawback provisions which allow the company to recover or cancel rewards where it is discovered that the employee has been involved in misconduct, or the company accounts have been calculated incorrectly. This helps protect the company and reduces the risks involved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
