Long-Term Incentives (LTIs) are designed to reward employees based on the company’s performance over an extended period.
Unlike short-term bonuses or variable compensation, LTIs encourage employees to focus on the company’s long-term success, fostering a sense of ownership and commitment.
This allows employees to purchase company shares at a fixed price, known as the exercise price, after a specified vesting period.
The vesting period is typically designed to ensure employees stay with the company long enough to contribute to its growth. If the company’s value increases, employees can purchase shares at a price lower than the market value, potentially profiting from this appreciation.
Vesting establishes a timeline for employees to acquire rights to their stock options. This process typically occurs over a set period, during which employees gradually gain full access to their options.
A key concept within vesting is the “cliff,” an initial period (usually one year) during which no rights to shares are acquired. After the cliff, a significant portion of shares becomes available all at once. Employees must remain with the company during this cliff period to receive their options.
This model allows employees to be promoted to company partners, granting them a share of the profits based on both individual and collective performance.
In this structure, employees become more engaged, as their efforts directly impact their financial rewards. Additionally, they gain a voice in strategic decision-making. The specifics of this model can vary depending on the level of responsibility assigned to employees promoted to shareholders.
According to a study published by Harvard Business Review, companies that implemented LTIs reported up to a 15% increase in talent retention and a 25% improvement in employee satisfaction. When implemented effectively, LTIs align employee interests with the company’s long-term goals, fostering commitment and driving performance. With proper guidance, both employees and shareholders can be well-informed about the financial and legal implications, maximizing the benefits while minimizing potential risks.
