hi there james with you for cow kind and in this video we're focusing on the concept of
long-term incentive plans but first how about a little incentive for us to keep you informed
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what a long-term incentive plan is under a long-term incentive plan a company rewards
those employees who can reach goals that increase the shareholders wealth the employees must
fulfill specific requirements and conditions in a long-term incentive plan also known as
ltip there are different types of ltips and recipients obtain capped options along with
stock rewards ltips are geared towards employees however the policy is a function of the organization
itself aiming to achieve long-term growth after creating a match between the company's
ltip and the growth plan of the company the employees ascertain the areas which require
the most attention to improve the business growth prospects and the earning potential
of the employees through compensation by employing the incentive plans a company can retain the
top talent in the evolving and highly competitive business environment so in summary under a
long-term incentive plan those employees are rewarded who can reach goals that increase
the shareholders wealth the employees must also fulfill specific requirements and conditions
mentioned in the ltip there are also different types of ltips and recipients obtain capped
options along with the stock rewards ltip policies are a function of the organization
itself aiming to achieve long-term growth with ltips employees ascertain the areas which
require the most attention to improve business growth prospects and the earning potential
of the employees through compensation but there's more to long-term incentive plans
let's take a deep dive by looking at the different categories of ltips they can generally be
divided into three broad categories namely appreciation based incentives are extended
to the employees based on the value of the company which is reflected through the share
prices in the case of the public companies the employees will obtain the difference between
the value of the underlying unit in the future and the value of the underlying units when
the stock's appreciation rights were received there's also a stock based ltip in this one
the value is given to the employees in the form of company's stock the incentive might
be tied with the achievement of specific goals but the employees will gain the company's
share ultimately the company might grant the phantom shares in which the value of the underlying
shares are tracked but cash is used for payout purposes then there's also a cash base incentive
the value to be delivered is not tied with company shares and is delivered in the form
of cash the cash payout will be received by the employees based on the services extended
by them or the achievement of the company's goals or both so what are the long-term incentive
vehicles well there are stock options this incentive vehicle gives the right to the grantee
to purchase the company's share at a pre-determined price in the future the fixed price is generally
the closing price of the stock on the date of the grant after the completion of the vesting
period the grantee can exercise the right to purchase the company's stocks the time
frame during which the grantee can exercise its option to buy the share is known as the
term generally the term is 10 years in case the value of the shares is lower than the
predetermined price decided during providing the grant then the options do not have any
value and these options are termed as underwater there's also stock appreciation rights sars
perform like a stock option the only difference is that the grantee will receive the change
in the value of shares in the form of cash the grantee is not required to purchase the
shares but will receive the cash in exchange for the value of the shares restricted stocks
these ltip vehicles are based on the fixed length of the time the equity can be granted
based on the number of the shares or based on the value performance units they are full
value shares and the vesting is dependent upon the predetermined performance goals the
goals can be relative absolute internal external or both they're popular because they can be
easily linked with long-term performance and payouts long-term cash units these are long-term
non-equity-based grants and the payout is made in cash the cash will be received by
the grantee faster than the completion of the vesting period performance cash units
these are long-term cash-based grants which are based on performance achievement the vehicles
are most common in the private companies because it has share valuation difficulty what is
vesting the long-term incentives are granted with a vesting period chiefly the grantees
are granted equity conditionally and the employees do not own it until the vesting period on
the lti expires it is a retentive feature of lti the grant is forfeited until the grantee
fulfills all the requirements related to the vesting for example the employee is required
to remain an employee of the company till a specific time after meeting the performance
goals the vesting period can be divided into two types namely raidable and cliff in the
cliff vest type the whole awards are paid out at once after the completion of the vesting
period in the raidable best time the awards are paid out in portions for example paying
25 of the award after four years only in the case of the employees ending their employment
with the company before the completion of the vesting period then the employees still
have the ownership of the word that has vested and lastly who should receive long-term incentives
long-term incentives are typically more prevalent for employees who are in a more elevated position
within a company put simply those who occupy roles higher in a company's organizational
structure have a greater ability to impact change with the organization which can in
turn have huge ramifications for shareholders so whilst there can be no discrediting of
the hard work completed by those lower down the rungs the money and rewards tend to flow
the way of the decision makers hopefully that gives you some key insight into the concept
of long-term incentive plans and if you'd like any further information on the topic
simply head across to kalkinemedia.com if you enjoyed this video then make sure to like
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latest videos from kalkine i'm james preston for kalkine
you