How to Design a Long-Term Incentive Plan to Meet Your Company’s Goals

There is significant flexibility in LTIP plan design to meet the goals of the company while at the same time incentivizing employees.

The following is a guide for employers to consider when designing and implementing an LTIP.

Establish Specific Corporate Objectives

The first step when designing an LTIP is to establish plan goals, which should directly reflect the company’s strategic priorities and anticipated results. For instance, if the company wants to increase revenue and reach certain financial benchmarks, its LTIP objectives should track these financial parameters and reward key executives based on achieving the pre-established targets.

It’s important for the company to align its objectives with those of the key stakeholders, such as shareholders, directors, officers, and employees.

Define the LTIP Measurement Criteria

The second step in LTIP design is to determine the criteria that will be used to evaluate and reward LTIP participants based on the achievement of the company’s goals. The criteria should be quantifiable, objective, transparent, and consistent with the company’s short- and long-term strategic goals. For example, if the company has certain revenue benchmarks over the next 10-year period, it may want to include several financial metrics that each support revenue generation and financial growth.

Establish Performance Levels

The third step is to establish a performance level or levels. Under a fairly simple LTIP, a single performance level can be established. Under a more complex plan, minimum threshold and maximum target performance levels can be established for purposes of determining a participant’s award.

The target levels should be attainable with the opportunity to earn higher LTIP award amounts for exceptional results. The LTIP target levels should incentivize key executives to achieve superior performance and achieve corporate goals.

Design the LTIP Payment Structure

The fourth step is to design a payout structure that will define the timing, and amount, of each participant’s LTIP awards. The payout structure should be objective and reflect the level of performance and contribution of each executive, as well as the risk and uncertainty involved in achieving the company’s goals. The award structure should also be transparent, clearly communicated, disclosed to the executives and stakeholders and follow the established rules and guidelines of the plan.

Regularly Evaluate the Plan

The final step with regard to LTIP implementation and operation is to regularly monitor and evaluate the plan to ensure that it is effective, complies with applicable law, and aligns with the company’s strategic goals.

It’s important for the company to conduct periodic reviews of the plan and consult with outside advisors, including legal counsel, to identify potential compliance issues and/or opportunities for improvement.

By working with experienced benefits legal counsel and advisors, a company can establish and operate a successful LTIP that benefits the employer and its employees. It’s a huge win-win.

For additional information, contact elangdon@fraserstryker.com or 402.978.5386.