What is long-term incentive compensation or an LTIC plan?

Once upon a time, workers stayed at the same company throughout their entire career. These days, you might hear that company loyalty is dead; employees leave jobs when they spot better pay or quicker promotions. What’s an HR department to do?

The answer: long-term incentive compensation (AKA LTIC). Not only does this kind of plan retain talent and help companies reach goals, it benefits employees directly, too.

What is a long-term incentive compensation?

Long-term incentives are compensation packages offered to higher-level employees at an organization because their decision-making usually affects the long-term vision of a company.

LTI’s include a base salary, benefits, and short-term and long-term incentives. Think of it as a reward system to inspire top performance — “tied to individual goals and objectives instead of a company’s revenue or share price.”

It’s a deferred strategy aimed at retaining talent.

What to expect from an LTIC plan

Finding the right LTIC plan is up to the employer and employee. Typically, a plan will be broken down into three brackets: base salary, short-term incentive, and long-term incentives.

Base salary

A base salary for high-level employees must be competitive and attractive. It’ll usually be based on how much other higher-ups make at the company.

Short-term incentives

Short-term incentives can come in the form of a bonus. These rewards are often based on short-term progress like meeting annual goals or achieving quarterly objectives. Short-term incentives can be financial or they can be something like extra vacation time, but they are usually based on individual performance, not a team.

Long-term incentives

Long-term incentives are where the big money is made — but it comes with commitment. This incentive benefits employees if they stay for a longer period of time. For example, stock-based or cash-based packages could be awarded to workers once certain company goals are met. Cash awards are usually offered at companies where stock options are non-existent.

Stocks

If an employee reaches targeted goals, they receive a share of the company stock.

Companies can offer restricked stocks — unregistered equity shares that are non-transferable and cannot be sold until the vesting date.

Employee stock options (ESO) also are commonly used in LTIC packages. These allow employees the right to purchase shares of the company’s stock at a pre-determined price at a later date. When shares of a company soar, it can be a valuable way for employees to grab shares but it takes time and potential risk since there’s no way of knowing what the full value will be until an employee reaches the time where they can execute their options.

Phantom stocks

Phantom stocks don’t mean you have equity ownership in the company. Employees receive mock stock, often called a shadow stock, that ebbs and flows like the company’s actual stock but usually can be reedemed in cash.

Retirement

LTIPs may also offer a 401(k) retirement plan, where companies match a percentage of an employee’s contribution while working at the company.

Finding the right LTIC plan for you

LTIC plans can be tailored to your needs depending on your individual goals. It’s a win both ways; employees get rewarded and companies retain talent.

Employees should speak to a financial advisor to you choose the right plan.