Picture this: Your top-performing employee just received an attractive offer from a competitor. 

While your salary package matches the market, you're wondering what else you could have done to prevent this situation. 

Enter Long-Term Incentive Plans (LTIs) – a powerful tool reshaping how companies retain their best talent. 

With 94% of publicly traded companies offering LTIs, these are no longer just perks for executives. From stock options to performance shares, these deferred rewards create a win-win scenario where employees build wealth while companies maintain continuity. 

Let's explore some long-term incentive plan examples to help you understand how it helps organizations regain employees’ trust. 

What are Long Term Incentives(LTIs)?

Long-Term Incentives (LTIs), or Long-Term Incentive Plans (LTIPs), are compensation schemes designed with a deferred payment structure that rewards employees over an extended period. The goal of LTIs is to encourage employees to stay with the company for a long time and keep up their good work. 

Since they mature in the future, LTIs play a critical role in employee retention. Typically offered through mechanisms such as stocks, profit-sharing, or deferred cash, they help businesses mitigate the costs associated with high employee turnover. 

Long-term incentive plan example: A case study of Amazon 

Amazon demonstrates a distinctive approach to long-term incentives, emphasizing long-term alignment between employees and company success. 

Here's how they structure it (Source):

Base compensation structure:

• Modest base salaries (executive officers capped at $175,000 as of 2019)
• Limited cash bonuses, mainly used only for new hire compensation
• Heavy emphasis on stock-based compensation

Key LTI features:

• Primarily uses restricted stock awards (RSAs) since 2002
• The vesting period extends over 5+ years
• "Back-end loaded" - vesting begins in years 3 or 4
• Awards based on subjective performance rather than predetermined metrics

Real numbers:

• In 2018, AWS CEO Andrew Jassy received RSAs valued at $19.5 million
• By December 2019, Jassy held 53,874 unvested shares worth $99.6 million
• Company-wide stock compensation exceeded $9.2 billion in 2020

Results:

• Amazon's stock has achieved a 33% compound annual growth rate over 10 years
• 97% shareholder approval rate for executive compensation in 2020
• Stock-based compensation distributed across departments: 55% technology, 19% marketing, 15% fulfillment, 11% administration

This approach has helped Amazon maintain high retention rates while aligning employee interests with long-term company growth.

Why do LTIs Matter?

Gone are the days when employees focused solely on take-home salaries. Today, they are increasingly interested in building long-term wealth and actively seek opportunities that help them achieve this goal. 

Here are a few reasons why LTIs matter:

Reduce costly employee replacements through sustained retention

By tying rewards to company performance, LTIs align individual employee goals with an organization’s long-term objectives. This encourages a focus on sustained results rather than short-term gains.

Attract senior executives who seek wealth-building opportunities

High performers understand their value and recognize how quickly they can advance in position and wealth. LTIs can attract these individuals to your company by positioning you as a clear pathway to their career growth.

Stand out among the 94% of companies offering basic LTI programs

While 94% of publicly traded companies offer LTIs to employees, the market significantly lacks dedicated tools for LTI planning. Common HRMs primarily focus on overall compensation management and lack features like performance-based vesting that encourage better employee performance. Companies that use specialized technology (like Compport) to build firm LTI plans can gain a competitive advantage among peers.

Types of LTIs (+ Long-term Incentive Plan Examples for Each Type)

Companies can choose from various LTI vehicles to create compensation packages that align with their business goals and culture. Each type serves different objectives, from pure retention to performance motivation, allowing organizations to mix and match options based on their workforce needs and growth strategy.

Here’s a quick sneak peek into the LTI types before learning more depth about them:

Restricted Stocks Units (RSUs)

Restricted stocks are shares awarded to employees subject to time-based or performance-based vesting schedules. Time-based vesting requires employees to remain with the company for a set period, while performance-based vesting ties the stock grants to specific company or individual milestones.

Pros:

• It is simple to understand, providing employees with tangible ownership once the shares vest.
• Encourages employee retention as vesting is typically tied to tenure or service-based milestones.
• Employees receive dividends or voting rights (for executive positions).

Cons:

• Restricted stocks may lack the motivational boost associated with performance-linked incentives.

Example

A software engineer joins a tech company and receives 1,000 RSUs valued at $50 per share ($50,000 total). These shares vest over 4 years with a one-year cliff:

• Year 1: Nothing vests (cliff period)
• Year 2: 250 shares vest ($12,500 value)
• Year 3: 250 shares vest ($12,500 value)
• Year 4: 500 shares vest ($25,000 value) If the stock price grows to $75, their unvested shares become worth even more.

Performance shares

Performance shares are primarily awarded to key employees, with the number of shares granted determined by the company's performance against specific goals or targets over a set period. Typical trigger conditions include revenue milestones, stock price targets, or other company-specific objectives.‍

Pros:

• Strong motivation for employees as the reward is tied to specific, measurable outcomes.
• Encourages alignment with long-term company success and performance.
• Often used to reward high-level executives and key employees for driving company growth.

Cons:

• Occasionally difficult to achieve, resulting in the forfeiture of the shares on failure.
• It can create uncertainty if targets are challenging or subject to change.

Example

A sales director receives 2,000 performance shares tied to company revenue growth:

• Base target: 15% annual revenue growth = 1,000 shares
• Stretch target: 25% yearly revenue growth = 1,500 shares
• Maximum target: 35% annual revenue growth = 2,000 shares. The shares only vest after 3 years if targets are met, creating a strong incentive to drive sustained growth.

Stock options

A stock option entitles an employee to purchase shares at a pre-determined price at a future date or during the vesting period. This pre-determined price, known as the 'exercise' price, can result in significant gains if the price rises.

Pros:

• Potential for significant financial gains if the stock price appreciates.
• Acts as a strong incentive for employees to focus on a company’s growth.
• Allows companies to tailor vesting schedules and conditions.

Cons:

• If stock prices fall below the exercise price, the options can become worthless, causing a negative morale.
• Requires upfront capital from employees to pay the exercise price.
• It can complicate tax filing for employees.

Example

A marketing manager gets options to purchase 5,000 shares at today's price of $20 (strike price), vesting monthly over 4 years:

• If stock rises to $35, they can buy shares at $20 and sell at $35
• Potential profit: $15 per share × 5,000 shares = $75,000 This rewards them for contributing to stock price growth.

Phantom stocks

Also known as 'shadow stock,' phantom stocks are a form of LTI that provides employees (usually upper management) with the benefits of stock ownership without transferring actual shares. In this arrangement, shareholders retain ownership without dilution, while employees receive the monetary benefits of the stock's appreciation.

Pros:

• It avoids diluting existing shareholders
• It can be flexibly tailored

Cons

• Cash payouts for unrealized stock price appreciation can strain cash flow.
• Taxed as income instead of capital gains for employees.
• Does not provide shareholding ownership to employees (potentially a drawback for senior executives).

Example

A private company grants a senior executive 10,000 phantom shares at $10 per share:

• Initial value: $100,000
• After 3 years, company value increases to $15 per share
• Payout: $150,000 ($50,000 gain). They receive the value increase without actual share ownership.

Cash rewards

Cash rewards are straightforward. Employees who achieve specific business or individual performance goals receive a cash payout. This simple and direct approach works for all types of employees and incentivizes target achievement.

Pros:

• Simple and easy for employees to understand.
• It can be customized to align with specific performance metrics.
• There is no connection with equity, making it more straightforward for employees and protecting existing shareholders from dilution.

Cons:

• Requires sufficient cash flow to fund payouts.
• The lack of an equity component may deter employees, especially in startups.
• Taxed as ordinary income.

Example

A product manager receives a $60,000 long-term cash award:

• Year 1: $0 (vesting period)
• Year 2: $20,000 vests
• Year 3: $40,000 vests Payment depends on staying with the company and meeting performance metrics.

Retention bonuses

Retention bonuses are financial rewards for employees for their continued service and long-term association with the company. These bonuses are typically distributed after a fixed tenure and serve as an incentive to retain talent.

Pros:

• Effective in retaining key employees during challenging periods.
• Does not dilute equity or ownership.

Cons:

• Employees can churn right after the reward is triggered.
• Employees may view it as a one-time incentive rather than part of a broader compensation plan.
  Does not incentivize better performance.

Example:

A key engineer receives a $100,000 retention bonus structured as:

• $25,000 after completing year 2
• $35,000 after completing year 3
• $40,000 after completing year 4. This incentivizes staying through critical project milestones.

Profit sharing

Profit sharing is an incentive model where employees, primarily key stakeholders, receive a portion of the company’s profits. Startups and small businesses use this approach to incentivize company growth without sharing equity.

Pros:

• Promotes focus on generating profits. Ideal when going 0 to 1.
• Businesses can flexibly change profit-sharing structures based on performance.
• Maintains ownership equity, avoiding dilution for founders and shareholders.

Cons:

• Payouts can be inconsistent. 
• It is not as attractive as equity for early employees for wealth building.
• Early employees lose benefits if they leave, reducing skin in the game. 
• Requires transparent financial reporting to ensure fairness and trust among employees.

Example

A manufacturing company implements profit sharing where:

• A manufacturing company implements profit sharing where:

• 10% of annual profits go to the employee pool
• The company makes $2 million profit
• $200,000 distributed among eligible employees
• Senior employees receive 2% each ($4,000)
• Mid-level employees receive 1% each ($2,000) The more profitable the company, the larger everyone's share.

Why Use a Long-term Incentive Planning Software?

Managing complex LTI programs across hundreds or thousands of employees requires sophisticated tools beyond spreadsheets. 

Here's how a specialized LTI software like Compport streamlines the process:

Give employees complete visibility into their wealth-building journey

A unified dashboard combines all compensation elements, showing cash, grants, and long-term incentives in one place. Employees can track their vesting schedules in real time and use interactive equity simulators to understand their potential stock growth. This transparency helps them see precisely what they've been granted, what has vested, and what they've exercised, creating more substantial engagement with their long-term rewards.

Build sophisticated incentive strategies with precision targeting 

The platform lets you build personalized LTI plans based on specific attributes like team, grade, tenure, and location. A rule-based engine helps construct complex incentive strategies. At the same time, scenario testing lets you evaluate different LTI structures by showing how each would play out in a real-world scenario. Organizations can set up performance-based vesting conditions and multipliers to align rewards with achievement, ensuring fairness and motivation.

Empower managers to make informed compensation decisions 

Managers gain comprehensive insights into budget distribution and team compensation trends. They can handle exception-based granting when needed and work through automated approval workflows. This level of control and visibility helps them make better decisions about their team's long-term incentives while staying within organizational guidelines.

Automate administrative tasks for greater efficiency

 The software streamlines administrative work by automating letter generation and distribution with configurable templates for different LTI types. It handles annexure attachments for plan documents and offers programmable release mechanisms. This automation reduces manual effort and potential errors in LTI administration. Imagine setting a few rules and then being able to auto-generate highly personalized letters for 1000s of employees at different levels, locations, and job roles. 

Make data-driven decisions with comprehensive analytics 

Access to pre-built reports that answer stakeholder queries quickly and effectively. Multi-dimensional data views provide insights into performance tracking and goal measurement. Real-time analytics help teams make informed decisions about their LTI programs, ensuring they remain competitive and effective.

All Set to Create Your Long-term Incentive Plan? 

Long-term incentive plans are transforming how companies approach talent retention and motivation. These tools, from RSUs to profit sharing, align effectively between employee success and company growth. Whether you're looking to retain key talent, attract senior executives, or build a culture of ownership, there's an LTI structure that fits your needs.

We hope these long-term incentive plan examples helped you understand how to approach LTIs in your organization. 

On that note, don’t forget to explore Compport's LTIP module. It helps you design, implement, and manage effective long-term incentive programs. 

Want to see Compport in action? 

Book a demo! 

FAQs 

What is an example of a long-term incentive plan? 

Here are a few examples of long-term incentive plans: 

• A software engineer receives 1,000 RSUs valued at $50 per share, vesting over 4 years: nothing in year 1, 250 shares in years 2-3, and 500 shares in year 4 
• An executive is granted 10,000 performance shares, which will vest after three years if the company achieves an average annual EPS growth of 10% during the performance period
• An employee is granted 5,000 stock options with a strike price of $50 per share, vesting over four years. If the stock price reaches $75 after the options vest, the employee can exercise the options and realize a gain of $25 per share

What are the four examples of incentives? 

The four most common long-term incentives are Restricted Stock Units (RSUs), Performance Shares tied to company goals, Stock Options with set purchase prices, and Phantom Stocks for private companies.

What is a long-term incentive benefit? 

A long-term incentive benefit is a deferred reward that vests over time, such as stock options or profit sharing, designed to retain employees while aligning their success with company growth.

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