What You Need to Know About Long-Term Incentive Plans

Key Takeaways

• Long-term incentive plans (LTIPs) are strategic compensation tools that align employee performance with sustainable business growth over three to five years, reducing turnover and protecting shareholder value.
• Modern LTIPs use a diversified portfolio approach combining RSUs for retention, performance shares tied to financial and ESG metrics, and selective stock options rather than relying on a single award type.
• The competitive landscape has shifted—53% of public companies now extend equity below the VP level to foster ownership culture and retain critical talent throughout the organization.
• Success depends on clear communication and leadership trust; even the most generous LTIP fails if employees don’t understand its value or believe in the company’s direction.

A Long-Term Incentive Plan, or LTIP, is a compensation strategy designed to reward and motivate employees for achieving the company’s long-term goals. Unlike annual bonuses, LTIPs are paid out over several years, typically three to five, creating a powerful retention mechanism while aligning personal success with sustained organizational performance and shareholder returns.

How does an LTIP work?

The vesting schedule defines the timeline an employee must wait before gaining full ownership of their award. This period typically spans three to five years, during which the employee must remain with the company. If they leave before vesting is complete, they forfeit the award—a powerful deterrent against premature departures.

Performance requirements add another layer of strategic alignment. Many plans tie vesting not just to tenure but to measurable business outcomes and performance metrics such as revenue growth, profitability targets, or shareholder return metrics. This ensures that rewards are earned through contribution to strategic objectives, not merely by staying in place.

The financial impact of this structure is significant. By requiring sustained performance over multiple years, LTIPs encourage decision-making that prioritizes sustainable growth over short-term gains, protecting your business from the risks associated with quarterly thinking while building competitive advantage through continuity and strategic focus.

The common types of long-term incentives

Modern LTIPs utilize four distinct categories of awards, each serving specific strategic purposes. Most sophisticated companies deploy a combination of these instruments to balance retention, motivation, and cost management.

1. Stock options grant employees the right to purchase company shares at a predetermined price in the future. Their value depends entirely on stock price appreciation, making them high-risk but potentially high-reward instruments. When your stock performs well, options can deliver substantial gains to participants. However, if the share price falls below the exercise price, they become worthless—a scenario that undermines their retention value and can damage morale. Understanding tax implications of employee stock awards is crucial when implementing these programs.
2. Time-based awards, particularly Restricted Stock Units (RSUs), represent a promise to deliver shares after a specified period. Unlike options, RSUs always retain value regardless of stock price fluctuations, making them exceptionally effective retention tools. They require no upfront payment from employees and vest according to a predetermined schedule, typically with one-quarter of the award becoming available each year over four years.
3. Performance-based awards, such as Performance Share Units (PSUs), tie payouts directly to achieving specific organizational goals. These might include revenue targets, earnings per share growth, or relative total shareholder return compared to peer companies. PSUs are increasingly popular because they ensure employees are rewarded only when the business succeeds, creating powerful alignment between individual compensation and company performance.
4. Cash-based awards offer long-term incentives without equity dilution, making them particularly attractive for private companies where share valuation is complex or liquidity is limited. These awards vest over time like equity instruments but are settled in cash rather than shares. While they avoid ownership dilution concerns, they may not create the same sense of partnership that equity ownership provides. Leaders weighing this decision should consider the strategic impact of bonuses versus salary adjustments when structuring total compensation.

Who receives LTIPs?

Traditionally, these plans were reserved exclusively for the C-suite and senior executives whose strategic decisions directly impact long-term company performance. This approach made sense when equity was scarce and companies wanted to concentrate ownership among those with the greatest influence on business direction. Even today, LTIPs remain most common and most generous at senior levels, with CEOs and executive officers typically receiving awards representing the largest portion of their total compensation.

However, a fundamental shift is underway. Approximately 53% of public companies now grant equity below the vice president level, extending ownership opportunities to managers and key contributors throughout the organization. This expansion is particularly pronounced in the technology sector and in European markets, where equity-like programs are used to foster a culture of ownership and retain top performers at all levels.

The strategic rationale for this democratization is compelling. When employees at multiple levels have a financial stake in the company’s long-term success, they think and act more like owners. This alignment drives better decision-making, increases engagement, and creates a powerful retention mechanism across your critical talent pool—not just at the top. Organizations considering this approach should also evaluate competency-based compensation strategies to ensure equity distribution aligns with skill development and individual contribution.

LTI trends in 2025: What leaders need to know now

The landscape of long-term incentives has transformed dramatically. The simple, one-dimensional plans of the past have given way to sophisticated strategies that reflect today’s complex business realities and stakeholder expectations.

1. The shift from one-size-fits-all to a diversified mix

The days of relying exclusively on stock options are over. Companies have moved decisively toward using a balanced portfolio of incentive instruments, and this shift reflects hard-won lessons about risk management and motivation.

Stock options dominated compensation packages in the 1990s, accounting for nearly 40% of total executive pay. They were attractive partly because accounting rules didn’t require expensing them—they appeared “free” on financial statements. That changed in 2006 when new accounting standards required companies to recognize the cost of options, leveling the playing field with other award types.

Market volatility exposed another weakness. When stock prices fell during economic downturns, options became worthless, eliminating their retention value precisely when companies needed it most. Leaders learned that relying on a single instrument created unnecessary risk in their talent strategy.

Today’s best practice involves a thoughtful mix of award types:

• 40-50% allocated to RSUs for their strong retention properties
• 40-50% to performance shares that reward achievement of strategic objectives
• 10-20% to stock options for their upside potential

This diversification creates more stable and predictable retention value while maintaining strong performance incentives. Companies refining their approach should explore best practices for bonus allocation and structure to complement their long-term incentive strategy.

2. Performance is being redefined beyond just profit

The metrics used to determine LTIP payouts have expanded far beyond traditional financial measures, reflecting broader stakeholder expectations and a more sophisticated understanding of sustainable value creation.

Relative total shareholder return (TSR) has become the dominant performance metric, used by 76% of public companies. Unlike absolute stock price appreciation, relative TSR measures your performance against a defined peer group, filtering out broad market movements to focus on competitive positioning. This approach ensures executives are rewarded for outperformance, not just riding a rising tide.

Environmental, Social, and Governance (ESG) metrics have moved from experimental to mainstream. Over 75% of larger U.S. companies now incorporate ESG measurements into their incentive plans, with even higher adoption in European markets. These metrics cover diverse objectives—emission reduction targets, gender balance goals, employee engagement scores, and supply chain sustainability measures. The message to employees is clear: long-term success requires attention to factors beyond quarterly earnings. Leaders building these frameworks can benefit from understanding ESG HR strategy for talent acquisition to ensure coherence across compensation and recruitment.

Human capital metrics have gained prominence as companies recognize that workforce quality and culture are leading indicators of future performance. Metrics tracking employee development, retention rates for key talent, diversity representation, and engagement levels now appear alongside traditional financial targets in many LTIP scorecards. This evolution reflects a fundamental shift in how sophisticated leaders think about value creation—not as a purely financial exercise but as an outcome of organizational health and capability. Organizations implementing these metrics should consider how aligning with employee needs strengthens both culture and performance.

3. LTIPs are being offered to more employees

What was once an exclusive perk for the C-suite is increasingly becoming a broader organizational tool. About 53% of public companies now grant equity awards below the vice president level, and this percentage continues to grow. In technology companies and startups, equity participation often extends to virtually all full-time employees, creating a genuine ownership culture from day one.

The practical considerations are real but manageable. Broader equity distribution requires more sophisticated communication and education efforts to ensure participants understand the value they’re receiving. It also demands careful planning around dilution and the total cost of the program.

However, companies that execute this strategy well gain a significant competitive advantage in attracting and retaining the talent that drives their success. Organizations managing this complexity may benefit from HR outsourcing services to ensure seamless administration and compliance.

4. The human factor still matters most

Despite increasing sophistication in plan design and metrics, the effectiveness of LTIPs ultimately depends on basic human psychology and organizational dynamics that haven’t changed.

Ownership transforms behavior. When employees hold equity, they view business challenges and opportunities differently. They think about trade-offs between short-term costs and long-term investments more carefully. They care about efficiency and waste reduction in ways that salaried employees often don’t. This psychological shift from “I work here” to “I own a piece of this” drives behaviors that create genuine competitive advantage.

Trust in leadership is non-negotiable. Even generous equity awards lose their power if employees doubt the company’s strategic direction or leadership’s competence. When faith in the future wavers, the promised value of unvested awards feels uncertain, undermining the retention effect. Leaders must recognize that their LTIP’s effectiveness is inextricably linked to their ability to articulate and execute a compelling vision.

The communication challenge persists across industries and company sizes. Many employees struggle to understand the mechanics and value of their long-term incentives:

• They don’t grasp vesting schedules
• They can’t value their awards accurately
• They don’t understand how performance metrics affect their ultimate payout

This confusion dilutes the motivational impact of what might be their most valuable compensation component. Companies that invest in clear, regular communication about LTIPs—using visualizations, examples, and simple language—see significantly higher engagement and appreciation from participants.

Fairness concerns never disappear. Employees compare their awards with peers and evaluate whether the distribution aligns with relative contributions. Perceived inequity can undermine morale even when absolute grant values are generous. Leaders must ensure their LTIP allocation philosophy is transparent and defensible, with clear criteria for determining who receives what levels of awards. Understanding how bonus allocation drives employee motivation provides valuable insights for structuring equitable long-term incentive programs.

A well-designed Long-Term Incentive Plan is more than a compensation mechanism—it is a strategic declaration about your company’s values and commitment to sustainable growth. In an environment where talent has options and short-term thinking threatens long-term value, LTIPs create powerful alignment between individual success and organizational performance. As a leader, your responsibility extends beyond designing competitive incentives to ensuring those incentives are clearly understood and directly connected to a compelling strategy for shared success. Organizations seeking to strengthen their compensation strategy should consider how to structure employee bonus programs that complement long-term incentives and create a comprehensive approach to total rewards.