Case of the Week: What’s a Long-Term Incentive Plan?

The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from New York is representative of a common inquiry related to compensation programs. The advisor asked:

“My client says she has a Long-Term Incentive Plan (LTIP). What is an LTIP? Is it a type of qualified retirement plan?”

Highlights of the Discussion

A Long-Term Incentive Plan is a type of compensation incentive program designed to reward executives for achieving the sponsoring company’s strategic objectives while maximizing shareholder value. It is not an IRC Sec. 401(a) qualified retirement plan [e.g., profit sharing or 401(k)], but rather, a way of compensating executives for reaching specified company performance goals.

An LTIP may be one component of a senior executive’s pay package, which may include:

  • base salary;
  • a performance-based annual incentive (e.g., annual bonus);
  • a performance-based long-term incentive;
  • benefits (e.g., Social Security, Medicare, Workers Compensation, and Unemployment Insurance, life and health insurance, nonqualified deferred compensation plans, etc.);
  • executive perquisites or “perks” (e.g., drivers to and from work, convenient parking, installation of home communications systems, financial planning, use of company airplanes for personal travel, etc.); and
  • contingent payments (e.g., payments to executives in the case of involuntary termination resulting from a merger or acquisition).

According to the Center for Executive Compensation, an LTIP can take the form of stock-based compensation, such as stock options, restricted stock, performance shares, cash or stock-settled performance units. Usually, LTIPs are a mix of types of equity, and may include a cash component.

The performance period for an LTIP typically runs between three and five years. The executive does not receive any pay from the incentive program until the end of the performance period and the performance measure is met. Long-term incentive goals vary by company, but the most prevalent are focused on Total Shareholder Return (TSR), operational measures such as earnings per share and return measures, such as return on assets. 

Conclusion

An LTIP is a general name for a type of compensation for executives, the form of which may vary depending on the company’s pay program. An LTIP can have a material impact on an investment client’s overall finances. Therefore, reviewing the documentation associated with such arrangements and understanding their impact can go a long way toward achieving a client’s financial goals.

Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.

©2018, Retirement Learning Center, LLC. Used with permission.

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