Long Term Incentives: The Key to Employee Retention

Compensation is a complex but vital part of any business. For most employees, it is not just about the paycheck they take home. To motivate and keep top talent over the long haul, companies need to think beyond base pay. This is when long-term incentives (LTI) come in.

These programs reward employees for sticking around and help align their interests with the company's long term goals. Whether it is bonuses, stock options, or other creative programs, long term incentives can be the secret sauce that keeps the best people engaged. This article explores some of the most effective ways to structure these incentives. With the right program, you can supercharge retention and performance.

Understanding Long Term Incentives

Long term incentives such as stock options or restricted stock units aim to align employee and company goals over the long haul. These vest or pay out over multiple years, motivating employees to boost company value and stick around.

Structured properly, long term incentives urge talent retention by providing “golden handcuff” employees do not want to lose by leaving prematurely. Companies giving long term incentives must balance costs, tax implications, and accounting concerns when designing programs tailored to their needs.

Vesting Aids Retention but Adds Complexity

• Vesting schedules mean employees must stick around to get their full rewards. This helps retain top talent.
• Vesting can get complicated. Companies use various schedules such as cliff vesting or graded vesting.
• The vesting period is the key. Short periods do not retain. But long periods frustrate employees.
• Consider 3–5-year vesting periods. Convey vesting clearly. Make sure employees see the big picture rewards.

Data-Driven Rewards for a Performance-Based Culture

• Long term incentives such as stock options tie rewards directly to company growth and profitability. This motivates employees to perform at peak levels.
• Analyzing performance metrics and setting clear goals allows companies to reward achievements. Employees see how their work contributes.
• Giving spot bonuses for major successes or milestones further reinforces outstanding contributions.
• The most successful incentive programs use real-time data to regulate rewards. This creates a high-performance culture.

Rules-based and performance-driven, but with discretion

Long term incentives must aim to balance rules-based structures with performance-driven payouts. This provides clarity around goals while allowing for discretion to account for sudden events. Companies use restricted stock units that vest over 3-5 years, tying wealth to long term stock price growth. Performance shares that vest based on metrics such as revenue and profit goals incentivize growth as well.

Retaining some discretion to adjust payouts up or down allows changes for market volatility or other surprises. The best plans are transparent about targets but recognize that business is unstable.

Types of Long Term Incentives Companies Offer

Some common long term incentives employers provide are:

• Stock options - Employees can purchase company shares at a fixed price in the future. This motivates them to improve the stock price.
• Restricted stock units - Employees receive shares of company stock as a bonus. The shares vest over time as an incentive to stay.
• Performance awards - Bonuses paid in cash or shares when employees achieve certain goals.
• Phantom stock: Employees get cash bonuses based on company share value, without owning stock.

How Long Term Incentives Boost Employee Retention

Long term incentives, such as stock options and equity compensation plans, can increase employee motivation and retention. When properly structured, these incentives:

• Reward long-term commitment to the company by vesting over multiple years.
• Align employee and company goals by tying compensation to company performance.
• Employees foster a feeling of ownership.
• Provide a major financial payoff when the company succeeds overall.

By focusing on the big picture and shared success, long term incentives make employees feel invested in the company. This boosts engagement, satisfaction, and the desire to remain on board over the long haul.

Key System Capabilities for LTI Management

• Accurate modeling of incentive plans based on financial metrics such as revenue, profit, stock price etc.
• Flexibility to manage different vesting schedules, performance periods, and award types.
• Integration with core HR systems for data on employees, teams, and other units.
• Reporting and analytics to track status of awards, model future payouts, and assess program performance.
• Automated award communications to participants.
• Compliance features to ensure incentive plans adhere to regulations and policies.
• Security controls to protect confidential compensation data.

Conclusion

Long term incentives are powerful tools for boosting employee retention when used strategically. The key is aligning incentives with business goals and employee values. Stock options, restricted stock, and deferred compensation plans each have their pros and cons. The most successful companies use a mix of programs tailored to different employee levels and interests. With the right incentives, companies can drive performance, promote loyalty, and retain top talent for the long haul.

At the end of the day, compensation is more than just dollars and cents - it is about making employees feel valued and invested in the organization's success. Approach long term incentives thoughtfully, communicate their purpose clearly, and track results over time. Do this well, and your best people will stick around.