LTIP

Long-term incentive plan (LTIP) is a compensation program used by employers to align the rewards of executives with the company’s long-term performance. LTIPs typically provide awards that vest over multiple years and depend on performance outcomes or continued service, rather than pay-for-performance within a single year.

Forms and structures: LTIPs commonly include equity-based awards such as stock options, restricted stock units (RSUs), and performance shares, as well as cash-settled long-term incentives. Vesting is usually three to five years, with a separate performance period that can extend four years or more. Performance targets may be absolute (e.g., earnings per share, return on invested capital) or relative (e.g., total shareholder return versus a peer group or a market index).

Administration and accounting: LTIPs are adopted by the board of directors or a compensation committee and, in many jurisdictions, require shareholder approval or compliance with plan caps. Tax treatment varies by jurisdiction; in the U.S., equity awards are expensed for accounting purposes and generally taxed to the recipient upon vesting or settlement. Under IFRS and US GAAP, the cost of equity awards is recognized over the service period and measured at grant-date fair value.

Considerations: LTIPs aim to attract, retain, and motivate senior talent, while aligning interests with shareholders. They can dilute existing owners and promote risk-taking if targets are poorly designed. Organizations may balance LTIPs with shorter-term incentives or alternative vehicles such as phantom stock or stock appreciation rights.