What is a LTIP?
Long-term incentive plans (or LTIPS) include various remuneration or reward systems for staff, typically senior managers or executives in your business.
If you want to attract top talent and preserve personal investment in your business success, offering an LTIP can be a powerful part of the package.
There isn’t a prescribed form your LTIP has to take, but usually, the employee needs to hit targets or achieve pre-agreed upon goals to earn their bonus.
In essence, if your management team increases the value of your shares, an LTIP recompenses them, usually after three to five trading years.
Options for creating an LTIP reward system
Most LTIPs run for three to five years, so they’re designed to stimulate ongoing progress rather than offer an immediate perk for a good month of work.
You also don’t need to honour the total amount at once, and it doesn’t need to be a cash value.
Some of the popular options for LTIPS include:
- Restricted stock
- Employee stock options
- Performance shares
As you can see, these reward staff with shares in the business, not a payment bonus, so you might need to look at how to value a company UK before assessing the value of the LTIP you’re offering.
Restricted stock LTIPs
Our first option means that the employee receives company ownership shares. Those shares carry restrictions and can’t be sold.
Your staff member might receive a promissory agreement that they will be issued a set number of shares at a specific date, but they won’t have voting rights until the share transfer.
Restricted stock awards are similar but mean that the shares transfer straight away, so your employee becomes a shareholder with the right to vote.
Employee stock option LTIPS
Next, you might look at offering employee stock options.
This sort of LTIP is best where your contracts provide a 6-month non-compete clause UK since the employee will have the right to buy shares at a fixed date for a set price.
If the company shares have gained value since, the individual can take up the option, buy the shares, and decide whether to sell them for a profit.
Non-compete contracts are essential here since there is a risk that an ex-employee with stock options could potentially impede your share value.
Staff with employee stock options may only be able to buy the shares if they remain on your payroll, so it’s wise to be cautious about the wording of the LTIP agreement.
Performance shares
The third form of LTIP involves performance shares. It is perhaps the most common way to leverage an incentives package to drive more significant growth.
In this scenario, your employee is allocated company shares, depending on whether they hit the performance criteria you’ve agreed on.
Performance share LTIPs are a great way to align managers and shareholders to a common goal, all with the overall aim of improving the value of the business.
Setting up the right LTIP for your start-up business
LTIPs are valuable ways to retain skilled managers, particularly for small start-ups that usually don’t have the capital to offer sizable salaries.
They might be one element of a total compensation package and it’s crucial to evaluate the best ways to incentivise managers to achieve the results you want.
An LTIP could be a viable option for your business if you’re looking for long-term progress. It can be a seamless way to connect employee compensation with the company’s success.
