In an era where attracting and retaining top talent is critical for organisational success, long-term incentive plans (LTIPs) have become a popular tool for aligning employee interests with company goals. Setting up an LTIP can seem daunting, but with careful planning and execution, it can be a powerful motivator and a driver of long-term business growth.
If you would like to learn more about how to set up an effective LTIP, key considerations to keep in mind and the benefits it can bring, read our practical guide below! For the basics of LTIPs, check out our piece here.
Steps to set up an LTIP
Step 1: Define your objectives
The very first step is to clarify the purpose of the LTIP. You should think about what do you want to achieve: Retain top talent? Drive business performance? Align employees’ goals with shareholders’ interests? Clarifying your objective will support the vision you have.
Step 2: Identify eligible participants
Here you should consider who would be eligible participants (and size of the participant pool). Participants in an LTIP typically include individuals whose performance and contributions are critical to achieving long-term goals of the company. These usually include:
- Senior executives and leadership team (CEOs, CFOs, heads of departments etc.).
- Key managers responsible for generating revenue.
- High-performing employees, specialists in fields vital to the company.
Who can participate in an LTIP will differ from company to company and it depends on what the company wants to achieve.
Step 3: Choose the right award type
Selecting the appropriate award type is a critical step as it directly impacts the effectiveness of the plan, tax treatment and the motivation impact on employees. There are several types of awards that can be granted under an LTIP and each comes with its own advantages, tax implications and risk profiles. The choice of the award should align with the company’s objectives and the expectations of the participants. Some of the most common award types are:
Nil cost options. Also known as ‘free share options’, they allow employees to acquire shares at no cost when the options vest.
- Conditional share awards. These involve granting employees shares subject to the fulfilment of certain conditions.
- Market value options. Also known as ‘standard options’, they allow employees to buy shares at their market value at the time the options are granted and employees then benefit from any future growth in share price.
Share appreciation rights. These allow employees to benefit from an increase in the company’s share price without actually owning the shares. Employees are granted a right to receive an amount (commonly in cash) equal to the increase in value of certain shares over a specified period.
Step 4: Set performance metrics
At this stage, it is important to define performance criteria that participants must meet to earn their rewards. Key things to consider include:
- Relevance. Metrics should reflect business goals, such as revenue growth or market share.
- Achievability. Targets you set should be challenging but attainable to maintain participants’ motivation.
- Timeframe. Metrics should align with the long-term goals of the company, usually over a few years.
Step 5: Determine vesting schedules
The vesting schedule defines specific timeframes or performance metrics when LTIP participants can claim their rewards, typically around 3-5 years (time-based) or when specific goal is achieved (performance based) or a hybrid of those two. This can be designed to encourage loyalty and performance. Be aware, that a vesting period that is too long may discourage employees, while one that is too short may not foster long-term loyalty.
Step 6: Consult legal and tax experts
When setting up an LTIP, consulting legal and tax experts is an essential step in ensuring that the plan is not only legally compliant but also structured for long-term success. Expert advice helps minimise risks, avoid potential pitfalls and ensure that the plan operates smoothly for both the company and its employees.
Key areas a legal expert can help you with include:
- Ensuring that the award terms include suitable protections for the company (for example, to minimise exposure to claims for loss of rights by departing employees or in relation to tax obligations).
- Advising on all company law requirements, such as any necessary shareholder approvals before operating the LTIP, as well as any corporate governance regulatory or best practice requirements that will be relevant to the company and its shareholder base.
- Advising on how participants will be taxed on their LTIP awards, and structuring the awards to qualify for any statutory tax benefits which may be available, and / or to reduce the company’s employer national insurance contributions costs.
- If the LTIP includes equity-based awards (such as share options), compliance with securities laws.
- If the LTIP involves sensitive employee information (such as salary information), compliance with data protection laws like UK GDPR.
- Developing legal documentation outlining terms and conditions of the plan, eligibility and vesting schedules which clearly reflect the commercial aims of the company (including any detailed corporate performance targets which need to be satisfied).
Step 7: Communicate to employees
Transparency is essential to the success of an LTIP. This can be achieved through one-on-one meetings, presentations or detailed LTIP documentation available to eligible participants. Make sure that participants understand:
- How the LTIP works.
- The benefits they stand to gain.
The performance metrics and their role in achieving them.
Step 8: Monitor and adjust when needed
An LTIP is not a ‘set it and forget it’ type of initiative. Its regular evaluation is crucial to assess whether the plan resonates with employees and motivates them, to track progress towards the established metrics and update the LTIP if the company’s goals shift or if there are significant market changes.
Benefits of an LTIP
A well-structured LTIP offers a range of benefits for both employees and employers, such as:
- Employee retention
One of the primary advantages is its ability to retain employees in the key roles by tying rewards to long-term performance and ensuring that employees must stay with the company for an extended period to fully realise their incentives.
- Attracting top talent
In a competitive job market, offering a well-designed LTIP can help differentiate a company from its competitors and attract high-caliber candidates. Talented individuals are often drawn to companies that offer robust compensation packages that include long-term incentives, as they provide a sense of ownership and participation in the company’s future success.
- Enhanced employee motivation
When employees have a stake in the company’s long term success, they are more likely to be motivated to perform at their best. LTIPs encourage employees to think strategically and make decisions that will benefit the company in the long run.
FAQs
What is the difference between EMI and LTIP?
Although both EMI and LTIP are employee incentive schemes, EMIs are designed to grant tax-efficient share options to employees and are tailored for SMEs with fewer than 250 employees. LTIPs are commonly used by larger companies to reward senior executives for achieving long-term performance goals. While EMIs are more tax-efficient than LTIPs, LTIPs are flexible and can include a variety of award types.
Can LTIP awards be forfeited?
Yes, awards under an LTIP can be forfeited if: the employee leaves the company before the vesting period ends, performance targets are not met or there are breaches of contract or misconduct.
What happens to an LTIP if an employee leaves the company?
Most LTIPs include a ‘good leaver’ and ‘bad leaver’ provisions:
- Good leavers (e.g. retirement or redundancy) may retain a pro-rated portion of their awards.
- Bad leavers (e.g. resignation or misconduct) typically forfeit all unvested awards.
Can LTIPs be amended after implementation?
Yes, but amendments usually require shareholder approval for listed companies. Any changes must also be communicated transparently to employees and comply with legal requirements.
What is the difference between an LTIP and a bonus?
An LTIP rewards employees for achieving long-term company goals, typically over 3–5 years, and often includes equity or performance-based awards. In contrast, a bonus is a short-term reward, usually paid annually or quarterly in cash, for meeting immediate performance targets, such as sales or financial goals. LTIPs are designed to retain employees over the long term and align their interests with the company’s future success, while bonuses offer immediate motivation for short-term achievements.
For any questions you may have concerning LTIPs, please contact our solicitor Suzy Giele.
