# Long-Term Incentive Plan (LTIP) Definition and Types

![Long-Term Incentive Plan (LTIP)](https://www.investopedia.com/thmb/Q_HcrXl51Uh5RYONGx982StHXrs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Long_term_incentive-plan_final-ee86916a99cb4263a8d5545ee1c6950b.png)

*— Investopedia / Michela Buttignol*

> **Definition**
>
> A long-term incentive plan (LTIP) rewards employees, often executives, for achieving goals that enhance shareholder value. By aligning employee incentives with company growth objectives, these plans not only retain top talent in a competitive environment but also serve as a strategic mechanism for long-term business success. Explore the different types of LTIPs, like stock options and retirement plans, to understand how they benefit both employees and companies.

## What Is a Long-Term Incentive Plan?

A long-term incentive plan (LTIP) rewards employees for achieving goals that increase shareholder value.

Typically, an LTIP requires the employee, usually an executive, to meet certain conditions. In some forms of LTIPs, recipients receive special [capped options](https://www.investopedia.com/terms/c/cappedoption.asp) in addition to [stock](https://www.investopedia.com/terms/s/stock.asp) awards.

### Key Takeaways

*   Long-Term Incentive Plans (LTIPs) reward employees for achieving goals that align with the company's growth and increase shareholder value.  
    
*   LTIPs often include stock options or retirement plans, such as a 401(k), which promote employee retention by offering financial incentives over time.  
    
*   Vesting schedules, including cliff and graded vesting, determine when employees gain full ownership of employer contributions or stock awards.  
    
*   LTIPs are designed to motivate employees to remain with the company by offering delayed compensation, distinguishing them from bonuses.  
    
*   An example of an LTIP is the share-based plan of Konecranes PLC, which rewarded employees with shares and cash based on employment and company performance.

## How Long-Term Incentive Plans Benefit Companies and Employees

A long-term incentive plan, while geared toward employees, is really a function of the business itself striving for long-term growth. When a company's growth goals align with its LTIP, employees know which performance areas to focus on for business improvement and personal compensation.

The incentive plan helps retain top talent in a highly competitive work environment as the business continues to evolve.

## Popular Types of Long-Term Incentive Plans

One type of LTIP is the [401(k) retirement plan](https://www.investopedia.com/articles/retirement/08/401k-info.asp). When a [business matches a percentage](https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp) of an employee's paycheck going into the plan, employees are more likely to work for the company until retirement.

The company may use a [vesting](https://www.investopedia.com/terms/v/vesting.asp) schedule to set the value of retirement contributions an employee can take upon leaving.

> **Important**
>
> In vesting, a company usually keeps part of its contributions during the first five years of an employee's tenure. Once an employee is fully vested, they own all of their retirement plan contributions moving forward.

  
There are two types of vesting: cliff vesting and graded vesting. For example, with cliff vesting, an employee may have 0% vesting for the first three years, then 100% thereafter. With graded vesting, an employee might be 0% vested after working at the company for a year, then 20% vested after the second year, then 40% vested after the third year, then 60% vested after the fourth year, then 80% vested after the fifth year, and then 100% vested after the sixth year of service.  

[Stock options](https://www.investopedia.com/terms/e/eso.asp) are another type of LTIP. After a set length of employment, workers may be able to purchase company stock at a discount while the employer pays the balance. The worker's seniority in the organization increases with the percentage of shares owned.

Companies may offer restricted stock, which employees must surrender if they leave within three years. Each year after, they gain rights to another 25%. After five years of receiving [restricted stock](https://www.investopedia.com/terms/r/restrictedstock.asp), the employee is usually fully vested.

## Real-World Example of a Long-Term Incentive Plan

In June 2016, Konecranes PLC's board approved a new share-based LTIP for key employees. The plan offered competitive rewards for earning and accumulating company shares.

The LTIP had a discretionary period of calendar year 2016. Potential rewards were based on continual employment or service and on Konecranes Group's adjusted [earnings before interest, taxes, depreciation, and amortization (EBITDA)](https://www.investopedia.com/terms/e/ebitda.asp). Rewards were to be paid partly in Konecranes shares and partly in cash by the end of August 2017. The cash was intended to be used to cover taxes and related costs.

Shares paid under the plan could not be transferred during the restriction period, beginning when the reward was paid and ending on December 31, 2018.

## How Does an LTIP Work?

An LTIP is a type of compensation that is earned right now, and paid out over time. This delay aims to motivate employees to stay with the company than they might otherwise, as a dangling carrot. As time passes, the employee will reap the rewards of the plan.

## Is LTIP the Same as a Bonus?

An LTIP is not necessarily the same as a bonus. A bonus might be awarded at a single moment in time, whereas a LTIP, by definition, is awarded over time.

## How Long Does an LTIP Last?

In order to motivate employees, a LTIP typically distributes awards over a period of three to five years.

## Key Takeaways on Long-Term Incentive Plans

Long-Term Incentive Plans (LTIPs) are designed to align the interests of employees with those of the business, fostering long-term growth and retention of top talent. These plans benefit the company by incentivizing key employees to focus on performance factors that enhance shareholder value. If offered an LTIP, carefully evaluate the plan's specifics, such as vesting schedules, and understand the trade-offs to make informed decisions.

> **Article Sources**
>
> 1.  Internal Revenue Service. ["Retirement Topics - Vesting."](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-vesting)