If we had to wager, we would bet you’re someone who has recently had a conversation with your boss about equity compensation and why it's a good idea for the business. You might even be trying to figure out the various types of plans and what would be best for your company. So here, we've come up with a piece that will answer some equity compensation 101 questions:
What is an LTIP?
And why should it be one of the first employee stock plans you look at?
What is LTIP?
LTIP stands for long term incentive plan, and it’s exactly what it sounds like. It’s a program that provides an incentive for employees to reach specific goals, generally tied to increased shareholder value. In the two most common types, appreciation-based and stock-based, employees receive options or shares after a certain amount of time – known as vesting. In a performance-based LTIP, the employees receive their shares or options after meeting certain goals.
That seems to cover a lot of ground, you’re thinking. And you’re right. An LTIP is a widely used term, one that encompasses a lot of plan designs. There’s a lot of flexibility, which brings us to the next point.
Simply put, part of an employee’s pay should be tied to the growth of the company – at least, for employees who can effect change in that growth. If they're in a position to help the company grow, and they do, then they get paid more. If they don’t – then they don’t.
You can send all the memos you want, and present the most eye-catching PowerPoints ever created – it won’t make your employees act like owners. With LTIPs, you show your employees the most important areas to effect continuous growth (which just so happen to be the most important areas for the company) and their long-term pay holds them accountable for implementing it. And, if your LTIP rewards them with shares or options, then they have an additional incentive to help make the company grow.
The best part about LTIPs is that they focus on the long-term. This is a great benefit for two reasons. First, and the most obvious, is that it encourages employees to remain with the company. Employee turnover can be an unnecessary black hole for your profits – according to studies when a business replaces a salaried employee, it costs six to nine months’ salary, on average, to train their replacement. This is more of an issue these days when most employees only remain with a company for an average of two years.
Second, LTIPs encourage focusing on long-term profits. Short-term profits are great, yes, but they usually come at a cost. Oftentimes, they come at the expense of customer relationships and are unsustainable. LTIPs align your company’s interests with the interests of your employees over a long period of time. They’re not just trying to hit targets for this year, they’re trying to move the company forward while hitting targets that help the company sustain its growth over the next couple of years.
Of course, a short explanatory guide can’t tell you everything – it can barely scratch the surface of the question: what is LTIP? If you want to learn more about LTIPs – and more specifically, if you want to answer your boss’s next question (‘And how do we set one up for our company?’) – contact us for a demo today.
Click here to read more about Long term incentive plans and how we can work with you.