Basics of Total Rewards

Long-Term Incentive Plans

Long-term incentives are elements of compensation plans that are intended to encourage employee retention and alignment with a company's long-term (over one year but commonly two to five years) goals and objectives.

Equity Compensation Plans

Equity compensation gives executives and employees the opportunity to share in the growth of their company and also provides a vehicle to attract and retain employees. When designed appropriately, equity compensation can align eligible employees with the interests of the company's shareholders. Equity compensation can also be designed to minimize cash compensation expenses.

Common types of equity compensation include:

• Restricted stock
• Stock options
• Performance shares
• Phantom stock
• Stock appreciation rights
• Employee stock ownership plans
• Employee stock purchase plans

Equity compensation, also known as stock-based compensation, is non-cash compensation that is offered to eligible employees. It allows the employees of the firm to benefit from the growth of the organization through stock appreciation. It can also encourage retention through vesting requirements.

In new-economy organizations:

• Equity plans are made available to a broader range of eligible employees. Generally, in traditional companies, only management is eligible for stock-based plans.
• Restricted stock awards (full-valued shares) are the most widely used form of equity compensation today.
• During an unstable stock market, employees will prefer stable, secure forms of equity compensation such as restricted stock awards or restricted stock units instead of stock options.
• Due to increased competition for talent, equity compensation can give new-economy companies a decided edge when looking to attract and retain talent who have a higher compensation risk tolerance.

For more information on how employee stock option plans work, please see DLC Course 20: The Basics of Equity Compensation.

Other Long-Term Incentive Plans

Cash-based awards may also be used in lieu of equity compensation when designing a long-term incentive plan. Many times, cash may be a more appropriate vehicle to deliver an award instead of stock-based compensation.