Remuneration Insights

Types of Long Term Incentive Plans
​By Mansour Baker, SHRM-CP
Posted 01 November 2019
Long term incentive schemes are to drive short-term, mid-term and long-term performance to motivate, enhance performance and retain employees.

Long-term Incentive Objectives

Create Shareholder Value
  • Encourage share price growth
  • Fund award through incremental value added
  • Leverage the company’s investment
 
Encourage Employee Performance
  • Encourage profitable multi-year investments
  • Help executives further understand long-term implications of business decisions and strategic direction of the company
 
Retention
  • Support retention of key executives and employees

Ease of Implementation
  • Board and regulatory approval
  • Plan adapted to fit within company and culture
  • Cost and share usage

Align with Market Practice
  • Align plan to international and local market practice

Summary of Long Term Incentive Plans​

The three plans would help drive short-term, mid-term and long-term performance:
​
Exhibit 1: Summary of Long Term Incentive Plans
3 Types of Long Term Incentive Plans​

1. Deferred Restricted Stock Annual Bonus
Plan would encourage employee retention, drive short term performance and mitigate risk.

  • Company offers eligible employees’ choice to invest up to 30% of annual bonus into company shares, restricted for one year
  • Company could grant an additional 20% of shares on invested amount, providing the employee with an incentive to wait for award payout OR give the employee a 20% discount on the share purchase price
  • Giving employees the choice to participate voluntarily will provide a clear picture about how employees view the company
  • Employees who invest bonus are better aligned with Shareholders
  • Company would guarantee 30% voluntary deferred cash value, but only grant the 20% additional shares if employees remain employed for the one-year deferral period
 
2. Three Year Performance Restricted Stock
Plan ties performance requirements to restricted stock allocations, driving performance over the three-year vesting period.

  • How many shares vest depends on achievement against performance conditions, based on company performance targets? Future looking performance targets would be set based on Corporate three-year plans
  • Awards would be discrete, granted only every three years, to target mid-term performance, prevent “double-dipping”, control share usage and ease administration
  • Target and maximum award values should vary by position level and be aligned to market rates
 
3. Five Year Thrift / Savings Plan
An integrated incentive and savings scheme for all company employees to buy Shares.
​
  • Employees allowed to enroll only once per year into 12-month savings contract.  Two invitations per year to allow new plan participants to come in (new recruits).
  • Price for Share purchase is average of 30 days prior to invitation
  • Each employee may contribute 5% to 15% of monthly salary by payroll deduction
  • Employee can suspend contributions at any time before end of Savings Period but has to wait for next invitation to re-enter plan
  • Savings will be applied at end of savings period to acquire Shares
  • Cumulative company match as a percentage of contributions per full year in plan. 15% for year 2; 25% for year 3; 35% for year 4; 50% for year 5
  • Shares purchased from Employee contributions may be withdrawn at any time, but employee will lose right to further company matches
  • Shares allocated as Employer contributions have ratable vesting, which begins after two-year period. 25% after year 2; 50% after year 3; 75% after year 4; 100% after year 5
  • Employee contributes 10% of annual salary each year for five years

The table below presents the target reward by Tier Levels (for eligible employees) by the plan:
​
Exhibit 2: Summary of Target Rewards
For all incentive schemes, the employee will only receive maximum award payouts if shareholder value increases.

Leavers
Leaver provisions provide a basis for dealing with (good leavers and bad leavers) participants leave the organization prior to the vesting period.

Implementation Steps
​
  • Company to set up and ‘fund’ with employee share allocation
  • Company to determine fund operating guidelines
  • Cost benefit model - inputs, assumptions and outputs
  • Finalize proposed fund costing and Board approval
  • Finalize fund documentation
  • Company awards eligible employees
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