Long Term Incentive Plan (LTIP)
Long Term Incentive Plans (LTIPs) are a way of incentivising senior employees to achieve certain performance targets, with the offer of shares in the company if targets are achieved.
Types of Long Term Incentive Plan
There are several kinds of awards that can be made under an Long Term Incentive Plan (LTIP), which are sometimes referred to as Performance Share Plans.
These include:
- nil-cost options
- conditional share awards
- share appreciation rights
- restricted shares.
The awards typically take the form of free shares being offered when certain conditions have been achieved.
LTIPs generally promote long-term staff retention, as multi-year vesting periods can ensure that participants remain with the company throughout the duration of the award. LTIPS also motivate employees to achieve success for the company, to allow their awards to come to fruition.
FAQs
What are the features of an LTIP?
- Participating employees will be senior executives who are able to directly influence the success of the company and offering them participation is aimed at aligning their financial interests with those of the company’s shareholders.
- The incentive will usually take the form of free shares.
- Pay out of the incentive will be subject to the achievement of set performance conditions over a three year period. However, it should be noted that there is a legislative requirement that the ria a gap of five years or more between the grant of the incentive and the pay-out.
What are the benefits of an LTIP?
LTIPS have the following 5 main benefits:
- Aligning Interests – LTIPs will typically grant employees a stake in the company’s equity and, clearly, this serves to align the interests of the employees with the shareholders.
- Recruitment – offering a competitive LTIP can increase the attractiveness of the company in the eyes of potential employees.
- Employee retention – participating employees are required to stay with the company for the duration of the multi-year vesting period and this serves to promote long term staff retention in the key roles within the company.
- Business Growth – LTIPS motivate employees to work hard and assist in the company’s growth plans in order achieve the rewards set out during the vesting period.
- Risk Mitigation – Participants are like to consider the likely impact on of their actions on the company’s future and, therefore, help to reduce the risk of employees making short term decision s that run contrary to the company’s interests.
How are LTIPs implemented?
There are 7 stages for implementation, as follows:
1. Shareholder Approval – A summary of the proposed LTIP must be approved by the company’s shareholders. Amongst other things, this summary should include:
- Who is eligible,
- The types of award that will be made under the plan
- The timings of the awards
- The holding period
2. LTIP Design – the company must design the LTIP and, amongst other things, this will include consideration of:
- The types of award to be granted,
- How the awards will be settled when exercised,
- Which employees should receive awards,
- How the awards will be granted, and,
- Good and bad leaver provisions.
3. Employee Consultation – the employees should understand the details of the LTIP, including its purpose, benefits and the impact their performance will have upon the incentives.
4. Decide Funding – the company must decide how the LTIP will be funded, for example, through cash or equity grants.
5. Establish Administrative Procedures – such procedures should set out the necessary processes for tracking and managing the LTIP grants, vesting schedules and pay-outs.
6. Drafting Legal Documents – the legal documents, including the relevant rules and agreements, must be drafted.
7. Tax and Accounting Consultations – The company must be aware of the LTIP on the company’s tax obligations and financial statements.
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