Long-term incentive plans—benefits and issues
Produced in partnership with Gill Murdoch and Jeremy Edwards of Baker McKenzie
Long-term incentive plans—benefits and issues

The following Share Incentives practice note Produced in partnership with Gill Murdoch and Jeremy Edwards of Baker McKenzie provides comprehensive and up to date legal information covering:

  • Long-term incentive plans—benefits and issues
  • Potential benefits of using an LTIP
  • Motivational effect and alignment of interests with shareholders
  • Flexibility
  • Minimising costs and share dilution
  • Accounting treatment
  • Key issues to consider
  • Complexity caused by performance conditions
  • Complexity caused by additional conditions
  • Companies Act 2006 and financial services considerations
  • More...

A long-term incentive plan (LTIP) is a term that is commonly used among listed companies to describe executive share plans under which a company makes share based awards to senior employees with a vesting period of at least three years and, commonly in addition, a two-year holding period. For an introduction into LTIPs, see Practice Note: What is a long-term incentive plan?

The use of LTIPs to motivate senior executives has become standard market practice for listed companies. However, in July 2016, the Executive Remuneration Working Group, an independent group established by the Investment Association, published its final report on executive remuneration structuring, in which it called for each company to consider whether a standard LTIP model remained appropriate for their business or whether the company should diverge away from the LTIP. In the view of the Executive Remuneration Working Group, instead of routinely adopting an LTIP, it was ‘imperative that companies consider the right structure for their business and engage with shareholders to understand their perspective on the choice of structure’. Alternative models to the LTIP that the Executive Remuneration Working Group considered appropriate included:

  1. deferral of bonus into shares—a significant proportion of an executive's bonus is paid in shares that vest over a significant time period, and

  2. restricted share award—an annual grant of restricted shares that will vest after a period of time

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