Compensation for Business Leaders

Long-term Incentive Plans (LTIPs)

The purpose of long-term incentives is to motivate, reward and tie leadership to the long-term success of the organization.

In contrast to STIPs, which are ordinarily paid in cash and tied to short-term goals, 1 year or less in duration, LTIPs more often are tied to strategic, long-term related goals, normally 2-5 years in duration, and may be paid out in cash or equity compensation. When business performance is not sustainable, top management is often criticized for focusing on short-term results. As a result, these LTIPs take on added importance. In the past, the traditional vehicle for providing long-term incentives was stock options where the value of shares could be readily ascertainable using an option pricing model. The use of stock options has come under attack because of:

• huge grants made to Executive Officers
• trading in or re-granting options that are "under water" in a stock market downturn (back dating)
• keeping the stock price high by any means (re-pricing)

The most common LTIPs are stock options and restricted stock. Well over half of companies utilize performance awards, also known as performance shares or performance units, where eligibility for a restricted stock award is based on the attainment of defined performance goals and objectives. Traditionally, participation in LTIPs was reserved for top management, the 5% percent at the top of the organization. LTIPs increasingly spread to lower levels of employees in the 1990s but have subsequently been curtailed by changes to accounting rules that require that they be expensed against corporate profits. Today, LTIP grants are typically allocated to the executive team, may include other levels of key management, and occasionally may include critical top professionals.

Insider trading. Top management may not be able to take advantage of increases in the price of the stock since they may not use insider information when selling or purchasing the stock. If they were to do so, this would be known as "insider trading." Organizations must use care in designing and administering plans that utilize company shares to avoid insider trading practices. Insider trading is a fraudulent practice with criminal convictions in a court of law. It is important to contact your legal counsel to avoid insider trading practices, even unsuspected, within your business.

Stock-related long-term incentive income paid to executives can be 100% or more of the sum of both salaries and bonuses earned.