What are the types of long-term incentive plans?
Posted by: Mansour Baker
Long term incentive plans (LTIP) are to drive short-term, mid-term and long-term performance to motivate, enhance performance and retain employees.
Three Types of Long-Term Incentive Plans
1. Deferred Restricted Stock Annual Bonus
The 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
Target and Maximum Award Values
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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 must wait for next invitation to re-enter plan
- Savings will be applied at end of savings period to acquire Shares
- Cumulative company matches 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 a 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
Saving Plan Model
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Long-term Incentive Plans 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 PlansThe three plans would help drive short-term, mid-term and long-term performance
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Leavers
Leaver provisions provide a basis for dealing with (good leavers and bad leavers) participants leaving the organization prior to the vesting period.
Good Leavers
- Includes employees leaving the organization due to death, disability, retirement, redundancy, or other reasons to be determined by the Board
- In case of death immediate pro-rated vesting of unvested awards given to beneficiaries permitted within 90 days
- All other Good Leavers, receive pro-rated proportion of awards as determined by the Board
Bad Leavers
- Includes employees leaving the organization voluntarily or due to termination or other reasons to be determined by the Board
- Forfeit all outstanding (unvested) awards under the program
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