Understanding Long-Term Incentive Plans: An Overview

Various employers want to make sure that they implement incentive plans with a long-term impact. Understanding different long-term incentive plans examples can give them valuable insights into what incentives may work best for their teams. In today’s article, we will delve into a comprehensive discussion of these long-term incentive plans and explore some of the best long-term incentive plans examples to get you started.

What Are Long-Term Incentive Plans?

Long-term incentive plans are pay programs that numerous companies use to reward employees for their efforts and contributions to the business. These plans reward employees over extended periods, typically ranging from 3-5 years. These long-term incentive programs aim to engage employees and match their interests with the organization's long-term goals.

Long-term incentive plans offer a win-win result, as per many employers. These plans not only motivate and encourage employees to contribute to the organization’s success but also reward them for their work and efforts. If implemented successfully, this can raise the percentage of top talent that stays with your company.

Long-Term Incentive Plans Examples

Looking at long-term incentive plans examples can help you determine which approach you want to take. There are a variety of long-term incentive plans examples, so it’s important to weigh each one up individually to see which looks best for you. The most common types of long-term incentive plans examples are:

• Stock Options

Adding stock options to your incentive program helps employees acquire company stock for an agreed-upon price. Employees can then opt to sell their stocks when the stock prices rise. These long-term incentive plans act as a reward for their contributions to helping improve the company’s value over time.

• Performance Shares

Performance share plans provide employees with shares when they achieve key performance indicators within a set time period. These performance indicators can be things like revenue, profit, or stock price targets. With an incentive such as this in place, it will motivate employees to focus on achieving metrics that will drive your business forward.

• Phantom Stock

Phantom stock is an incentive that pays employees the equivalent of dividends on a set number of shares. The phantom aspect applies as employees aren’t actually awarded shares, but the payments will increase if the shares go up. This aligns employee rewards with stockholder gains.

• Deferred Compensation Plans

This is one of the long-term incentive plans examples that allow employees to defer a portion of their salary for retirement. Organizations can choose to match a percentage of an employee’s contribution as a method of incentivizing employees to participate in the plan. This deferment of funds will remain tax-free until the day that an employee withdraws it when they retire.

Seeing the lists of long-term incentive plans examples implies that the majority of incentives are in the form of financial. Many companies implement these types of plans to motivate and drive their employees to stay in the organization for a long time. If you craft long-term incentive plans right, you will have a hardworking team that stays in your company for many years.

Pros and Cons of Long-Term Incentive Plans

Looking at long-term incentive plans examples, it appears like positive news for both the companies and employees. But this isn’t the entire case, as this plan also comes with a few disadvantages. Here are some pros and cons of long-term incentive plans:

Pros:

• Aligns Interests

By assessing long-term incentive plans examples, you will find how it can be effective to align employees’ interests with the goals of the business. This plan motivates employees to make informed decisions that are beneficial to the organization for years to come. If crafted and implemented successfully, the long-term incentive plans will also be beneficial to employees, knowing that they will receive a reward.

• Boosts Retention

Long-term incentive plans are like a special reward system that encourages employees to stick around for a long time. When you stick with a company for a long time, you get awesome rewards from special plans. This is a win-win—it's great for employees who get cool benefits, and it's super helpful for the company because it saves money on hiring and builds a stronger team.

• Offers Tax Benefits

Long-term incentive plans also bring tax benefits for both employers and employees. This happens because payments are usually subject to a lower capital gains tax rate.

Cons:

• Costs

It is evident that there can be a high cost for employers when looking at the long-term incentive plans examples. This is due to the monetary aspect that long-term incentive plans have. When looking at the ultimate payout, it can be difficult to accurately predict how much this will be.

• Uncertain Outcomes

It’s difficult to predict what business outcomes over multiple years will look like. As a result, employees may not end up getting close to achieving goals for incentives. On the other hand, performance may exceed expectations, which can leave employees feeling like they’ve done enough.

• Manipulation

Employees may make short-term decisions that can maximize their long-term incentive plans payouts. If this happens, it may not benefit the organization eventually. To prevent this from happening, employers need to put up strict guardrails and have the necessary oversight for all incentives.

Find the Right Balance for Your Organization and Employees

Now that you have seen the long-term incentive plans examples and the pros and cons of implementing them, it’s time to make a decision. For many, the pros of long-term incentive plans outweigh the cons.  But for others, this isn’t the case.

Take enough time to find out which long-term incentive plans offer you the right balance between engaging your employees and fairly rewarding them. Remember though that long-term incentive plans may not be suitable for everyone. That said, you should not feel obliged to commit to them. Take the steps now to see if long-term incentive plans are the right choice for your organization.