What is Long-Term Incentive Plan ?

1873 reads · Last updated: December 5, 2024

A long-term incentive plan (LTIP) is a company policy that rewards employees for reaching specific goals that lead to increased shareholder value. In a typical LTIP, the employee, usually an executive, must fulfill various conditions or requirements. In some forms of LTIPs, recipients receive special capped options in addition to stock awards.

Definition

A Long-Term Incentive Plan (LTIP) is a company policy designed to reward employees for achieving specific goals, thereby increasing shareholder value. Typically, LTIPs are aimed at executives who must meet various conditions or requirements. In some forms of LTIP, beneficiaries receive not only stock awards but also special restricted options.

Origin

The concept of LTIPs originated in the mid-20th century, evolving with the rise of corporate governance and shareholder value principles. Initially, these plans were primarily used for executives to align their interests with the long-term interests of shareholders.

Categories and Features

LTIPs are generally categorized into performance-based and time-based awards. Performance-based awards require employees to meet specific financial or operational targets, while time-based awards require employees to serve the company for a certain number of years. Key features of LTIPs include their long-term nature, linkage to company performance, and their motivational impact on employees.

Case Studies

A typical example is Apple Inc., where executives' LTIPs include stock options and restricted stock units (RSUs) tied to the company's stock performance. Another example is Tesla, where CEO Elon Musk's compensation plan is entirely based on achieving market capitalization and operational goals, ensuring that executives' interests align with long-term shareholder interests.

Common Issues

Investors might encounter issues such as misunderstanding the complexity of LTIPs and lacking patience for long-term goal achievement. A common misconception is that LTIPs only benefit executives, overlooking their positive impact on overall company performance.

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