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How does a Long Term Incentive Plan LTIP work for employees?


My company recently introduced a long term incentive plan for managers at my level. It just sounds like a deferred bonus program. How are they suppose to work?


Typically a long-term incentive plan (LTIP) is designed as a replacement for, or a supplement to, a stock option incentive plan. LTIPs may involve stock awards, cash compensation, or both (private companies typically award cash while public companies typically award stock). LTIPs are typically based on one or more long term goals in a company's strategic plan, such as a long term profit target, and function over the same time horizon as the strategic plan (i.e. 3 to 5 years). LTIP awards may be vested over time or paid in full at or sometime after the measurement period. If designed well, the performance targets that determine the amount of the LTIP award require employees to consistently increase shareholder value over multiple years in order to maximize their LTIP award (such as delivering a certain amount of cumulative revenue and profit over multiple years). However, there are many examples of poorly designed LTIPs that amount to little more than a deferred bonus plan that is entirely dependent on annual performance and not impacted by cumulative performance over multiple years.