Do Long Term Incentive Plans for pay actually incentivise anything?

Research Briefing

Keywords: Long Term Incentive Plans, pay, remuneration, reward, CEO pay incentives, CEO incentives

Long Term Incentive Plans have been part of organisational thinking for a long time. In 1970 approximately 7% of organisations had some form of Long Term Incentive Plan, by 1985 this had grown to approximately 40% of organisations and by 2017 approximately 54% of organisations had some form of Long Term Incentive Plan for executives.

The idea behind a Long Term Incentive Plan is to reward senior management for achieving earning goals (usually) typically over a 4-5 year period.Long Term Incentive Plans are used in combination with more traditional stock or share options to ‘connect’ the executive to the company and ensure they have some ‘skin in the game’.

Logically, many see the appeal of having some form of Long Term Incentive Plan to motivate senior managers to:

  1. Be attracted to and stay with the company long term.
  2. Deliver superior performance, usually in terms of earnings or other financial performance such as share price.
  3. Align the interests of the executive team with those of the shareholders or owners of the company.

It is estimated that approximately a third of executives’ total earnings come from Long Term Incentive Plans. However more recent research has severely questioned whether LTIP’s actually do promote better organisational and senior management performance.

This research briefing is essential reading for anyone interested in the effectiveness of reward in general and Long Term Incentive Plans in particular.

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