How does a Long Term Incentive plan work? - YouTube

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

the best way to do that is to subscribe to the channel and for your own benefit click

the bell icon to stay across the latest videos from cow kind alright let's take a look at

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

share comment and subscribe and don't forget to press the bell icon to stay across the

latest videos from kalkine i'm james preston for kalkine

you