What Is Long Term Incentive and How to Implement It?

Long term incentive plays a vital role in the compensation strategies of modern companies. The incentive encourages employees to contribute to the company's growth over many years.

It offers definitions and explanations of the various components of long-term incentives and how to implement them successfully into your pay programs. Use this resource to create effective long-term incentive programs for your employees.

1.0 What is a long term incentive (LTI)?

A long term incentive is awarded to employees based on the performance measured over three or more years. The goal of this incentive is to link the employee's pay to the success of the company.

The employee might receive company stock or cash that will vest sometime later. This type of incentive encourages employees to consider the company's future as opposed to their current tasks.

These incentives are only earned when specific targets are met or when the employee has stayed with the company for the necessary amount of time. The value of these incentives will depend on the performance of the company.

Companies use long term incentives to attract employees and retain them. Thus, everyone benefits from the company meeting its long term goals.

HR teams frequently review Market Compensation Data to determine whether their long-term incentive plans remain competitive compared to other organizations within the same industry.

2.0 What types of LTI long term incentives do companies typically offer?

Companies offer various types of long-term incentives to support their business goals and reward their employees.

Restricted Stock Units allow employees to receive company shares after a specific period of time. Stock Options allow employees to purchase the company's shares later at a specific price. Performance Share Units allow employees to receive company shares only if the company achieves specific goals during that performance period.

2.1 What are restricted stock units (RSUs)?

Restricted stock units indicate that employees will receive company shares when specific conditions are fulfilled. They do not confer company ownership rights to employees when they earn them but allow companies to encourage employees to remain within the company. Employees will earn shares after the vesting period. Companies benefit as they do not have to spend cash to reward employees.

Restricted stock units increase in value alongside the company stock price, motivating employees to contribute to the company's success. HR professionals like restricted stock units as they are easy to administer.

Unlike options, RSUs have value even if the stock stays flat. Many public companies use them widely to build long-term commitment.

2.2 How do stock options work in long-term incentive plans?

Stock options give employees the right to buy shares in the company at a specified price during a future timeframe.

• When the stock market price goes above the initial price for the stock, employees can exercise their options and make a profit.

• There is usually a vesting schedule for stock options that require employees to remain in the company for several years before they can use their stock options.

• Stock options can last for five to ten years, which gives employees plenty of time to see the company grow.

• This stock option plan works best for companies that are looking to grow because it only rewards employees when the value of the company increases.

Many organizations integrate stock options into Merit Compensation Planning, which connect performance evaluations with compensation rewards.

2.3 What are performance share units (PSUs)?

Performance share units tie the number of shares to company goals. The number of shares can increase or decrease based on how well the company meets those goals. Employees only receive the shares after the company achieves the goals during that period. This type of award encourages employees to focus on the goals and the company's long-term success.

PSUs add fairness because rewards match actual achievements rather than just time served. Compensation teams use them to align executive pay with business strategy. The units often combine with a time-vesting element for extra retention power.

Overall, PSUs turn compensation into a true pay-for-performance tool.

2.4 How does equity compensation support pay-for-performance?

By linking employee rewards to company results, stock options encourage managers to seek higher stock prices and profits for the company.

• The stock award plans include targets to show employees how their work contributes to the company's profits.

• The plans are reviewed and changed to ensure fairness and relevance to the company.

• The program reduces the company's costs as it only rewards managers when the company achieves profits.

3.0 How are LTI plans structured and managed?

LTI plans follow a framework that ensures all elements of the plan are balanced with the goals of the company.

• The company must determine who will receive the incentives and the type of incentives that will be given to each of these individuals.

• Following the determination of the individuals that will receive the incentives, the plan must be documented in a plan document that includes performance measures and vesting schedules for the employees, and that is approved by the company's board of directors.

• An oversight committee will monitor the implementation of the plan each year to ensure that any issues or events that impact the company and employees are accounted for.

• The plan must be communicated to the employees and be reviewed for compliance with company and governmental regulations.

HR leaders frequently use Salary Planning Strategy resources to develop structured compensation frameworks that include long-term incentives.

3.1 What is a vesting schedule and why does it matter?

A vesting schedule dictates the timeline in which employees will own their awarded shares or cash.

• They protect the company's investment should the employee leave the company prior to award ownership.

• The majority of vesting schedules take three to five years to allow employees to focus on the company's long-term goals.

• Vesting schedules allow employees and employers to have career clarity and improve employee retention.

3.2 What is the difference between cliff vesting and graded vesting?

Cliff vesting and graded vesting are two popular ways to release LTI awards over time.

Aspect	Cliff Vesting	Graded Vesting
How it works	Nothing vests until the full period ends, such as all shares after three years.	Portions vest gradually, like 25 percent each year over four years.
Example	An executive waits three full years then receives 100 percent of the award.	An employee gets 20 percent of shares every year for five years.
Main benefit	It strongly encourages people to stay the entire time without partial payouts.	It gives earlier rewards and keeps motivation high throughout the period.
Common use	Good for senior leaders where full commitment matters most.	Ideal for broader employee groups who value steady progress.

4.0 How do HR leaders implement an effective LTI plan?

HR leaders can create successful LTI plans by following a sequence of steps for creating the program.

1. Review the company's strategy and the behaviors and goals that should be rewarded. Ensure that the incentives align with the leadership team's three- to five-year business goals.

2. Determine the type of awards to offer employees, such as RSUs or PSUs, and benchmark these awards with similar companies. Determine who will be eligible for these awards and what goals must be met.

3. Create a vesting schedule for the awards and performance goals for employees. Ensure that any awards account for taxes and remain within financial projections for the company.

4. Communicate the LTI plan to the company's employees. Train managers and employees on the incentive program and provide updates as necessary.

5. Review the LTI plan every year to determine its successes and necessary changes.

5.0 FAQs

Here are some FAQs for better understanding:

5.1 What performance metrics are usually used in long term incentives?

Profitability measures such as earnings per share or EBITDA top the list for most companies. Total shareholder return also appears frequently, especially in public firms. According to the WorldatWork Incentive Pay Practices report, 65 percent of publicly traded companies rely on profitability while 47 percent use total shareholder return. These metrics keep plans focused on real value creation in 2026 and beyond.

5.2 What are the risks of poorly designed LTI plans?

Poorly designed plans can lead to misaligned goals, high turnover, or unexpected costs when metrics prove too easy or too hard. They may also create shareholder concerns if awards dilute ownership without delivering results.

The WorldatWork report notes that companies adjust LTIs when market conditions shift, showing the danger of rigid designs. Strong oversight and regular reviews help avoid these problems in 2026.

5.3 Why do companies include long term incentives in their total rewards strategy?

Companies add LTI to align employee effort with lasting business success and improve retention at the same time. These plans also help attract top talent who value future upside over immediate cash.

The WorldatWork Incentive Pay Practices report shows that 75 percent of public companies use LTIs mainly to link rewards to long-term goals. This approach strengthens total rewards and supports growth strategies heading into 2026.