Understanding Long-Term Incentive Plans for Private Companies

Attracting top talent is one thing—keeping them around long-term is another. For private companies, Long-Term Incentive Plans (LTIPs) provide a way to make employees feel truly invested in the company’s success. These plans go beyond traditional bonuses, offering rewards that grow as the business grows.

In fact, companies with the presence of a corporate incentive program have motivated 66% of employees to stay at their jobs.

In this guide, we’ll break down the essentials of LTIPs, explore why they are crucial for private companies, and provide insights on how to design and implement an effective plan that supports both employee satisfaction and business success.

The Fundamental Purpose of LTIPs

Long-term incentive plans (LTIPs) play a critical role in shaping employee engagement and aligning personal goals with company success.

Designed to reward employees for their sustained contributions, LTIPs foster a deeper sense of ownership and commitment, ensuring that employees stay motivated to drive long-term growth:

• Aligning Employee Success with Company Growth: LTIPs directly tie compensation to long-term company goals, encouraging employees to think beyond immediate tasks. By offering rewards based on equity or performance, employees have a vested interest in the company’s success, creating a direct link between individual contributions and organizational achievements.
• Fostering Ownership and Loyalty: Equity-based rewards, such as stock options or restricted stock, give employees a sense of ownership in the company. This encourages loyalty and helps retain top talent by offering financial rewards that mature over time. Employees are incentivized to stay with the company, contributing to its growth and success.
• Attracting and Retaining Top Talent: For private companies, where stock options aren’t easily liquid, LTIPs offer a compelling alternative to cash-based compensation. By aligning rewards with the company’s future growth, these plans attract skilled professionals looking for long-term financial benefits, while also keeping them committed and engaged.
• Creating a Performance-Oriented Culture: LTIPs motivate employees to exceed their performance targets by linking compensation to measurable achievements. This drives a culture of accountability, where employees are motivated to contribute to the broader business strategy, ensuring that their personal goals align with the company's long-term vision.
• Balancing Risk and Reward: LTIPs offer delayed gratification, which can be a risk for employees. However, they are rewarded with significant financial growth once long-term milestones are achieved. This risk-reward balance fosters a deeper commitment to the company’s future, driving employee resilience and engagement.

Now that we grasp why LTIPs are so critical, it’s time to examine how their design differs depending on whether a company is public or private. The challenges and opportunities vary significantly between the two.

Key Differences Between Public and Private Company LTIPs

Long-term incentive plans (LTIPs) are crucial for both public and private companies, but the way these plans are structured and executed can differ significantly. While the core purpose of LTIPs remains the same—to align employee compensation with the company's long-term success—the methods and tools used to deliver these incentives vary based on whether the company is public or private.

With those distinctions in mind, let’s look closer at the specific LTIP structures most commonly used by private companies to align incentives and reward their teams.

Common LTIP Structures for Private Companies

Long-term incentive plans (LTIPs) are crucial for private companies looking to motivate, retain, and reward employees over time, particularly in the absence of publicly traded stock.

While the goal remains to align employee interests with the company’s long-term success, the structures of LTIPs in private companies differ from public counterparts, often incorporating more creative solutions.

Below, we explore some of the most common LTIP structures used by private companies:

1. Stock Options

Stock options are one of the most common forms of equity-based LTIPs in private companies. Employees are granted the right to purchase company stock at a predetermined price (the strike price) at a future date. The reward is realized when the company grows and the stock price increases, allowing employees to purchase shares at the lower strike price and sell at the current market value, which increases as the company becomes more successful.

• Vesting Periods: Typically, these options come with a vesting schedule, ensuring that employees remain with the company for a specific number of years before they can exercise the options.
• Challenges: For private companies, the challenge lies in determining a fair market value for the stock, as there is no public exchange to reference. Additionally, liquidity can be an issue—employees can’t sell their options on the open market until the company undergoes an exit, such as an acquisition or IPO.

2. Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are another popular LTIP structure for private companies. RSUs grant employees a specified number of shares in the company, but these shares are restricted and subject to a vesting schedule based on time or performance milestones.

• Vesting: Like stock options, RSUs typically come with a vesting schedule, where employees must remain with the company for a set period or meet performance targets to fully own the shares.
• No Purchase Required: Unlike stock options, RSUs do not require employees to buy the stock; the company grants them the shares outright, but the shares are “restricted” until the vesting conditions are met.
• Tax Implications: Upon vesting, RSUs are considered taxable income, meaning employees must pay income tax based on the value of the shares at the time they vest.

3. Phantom Stock

Phantom stock is a unique LTIP structure that allows employees to share in the company’s growth without granting actual equity. Instead of issuing actual shares, companies award “phantom” stock units that mirror the value of the company’s stock.

• Cash or Stock Payout: When the phantom shares vest, employees receive a cash payout or, in some cases, actual stock based on the current value of the company. This makes phantom stock particularly attractive to private companies that wish to offer equity-like incentives without issuing actual shares.
• Vesting: As with stock options and RSUs, phantom stock plans are often tied to a vesting schedule or performance milestones.
• Advantages: It avoids the complexity and potential dilution of issuing real equity, making it a simpler and more flexible incentive for private companies.

4. Stock Appreciation Rights (SARs)

Stock Appreciation Rights (SARs) are similar to phantom stock but have a slightly different structure. SARs allow employees to benefit from the appreciation of the company’s stock over a set period. Employees are granted the right to receive the difference in value between the stock price at the time of grant and its price at the time of exercise.

• Cash or Stock Settlement: Like phantom stock, SARs are typically settled in cash or stock, depending on the terms of the plan.
• No Upfront Purchase: Employees do not need to purchase the stock; they simply benefit from the increase in value.
• Flexible Payouts: This structure offers flexibility in how the company compensates employees, as it doesn’t require issuing actual stock unless the company chooses to settle in equity.

5. Profit Sharing Plans

Profit-sharing is a form of incentive where employees receive a share of the company’s profits, typically based on overall performance or meeting specific company goals.

• Cash Payouts or Deferred Compensation: This model may include annual cash payouts or the option to defer payouts for future compensation. In many cases, profit-sharing plans are tied to long-term financial milestones.
• Simple Structure: Profit sharing can be a more straightforward LTIP structure, as it doesn’t require issuing equity or tracking stock values.
• Encourages Collaboration: Because profit-sharing aligns employees with the company’s financial success, it encourages teamwork and a collective effort to improve profitability.

Understanding these options is only part of the picture. To build an effective LTIP, companies must also navigate important valuation, tax, and retention considerations that shape the plan’s impact.

Key Considerations in Designing LTIPs for Private Companies

Designing an effective Long-Term Incentive Plan (LTIP) for private companies involves more than just offering attractive rewards. It requires a strategic approach that takes into account valuation considerations, tax implications, retention benefits, and alignment with the company’s long-term business objectives. By considering each of these factors carefully, private companies can create LTIPs that not only motivate and retain key talent but also drive sustainable growth.

1. Valuation Considerations for Private Companies

One of the most significant challenges private companies face when designing LTIPs is determining how to value the company’s equity. Unlike public companies, which can rely on market prices, private companies must regularly assess their valuation through third-party appraisals or internal financial models.

• Third-Party Valuations: These are essential to provide an accurate, unbiased valuation of the company, especially when issuing stock-based incentives like stock options or RSUs.
• Internal Valuation Models: In the absence of external appraisals, companies may create their own internal models, but these should be carefully crafted to avoid undervaluing or overvaluing equity-based rewards.
• Strategic Growth Stages: As the company grows, its valuation will evolve. LTIPs should be designed to reflect these changes, ensuring that equity-based rewards grow in value over time.

2. Tax Implications and Considerations

Taxation is another crucial factor in designing LTIPs, as both the company and its employees must comply with tax regulations. Private companies have more flexibility than public companies, but there are still important considerations when offering equity-based compensation.

• Stock Options and RSUs: In many cases, stock options or RSUs in private companies are taxed when they vest or are exercised. The company must ensure that employees are aware of these tax implications and plan accordingly.
• Phantom Stock and SARs: With structures like phantom stock or Stock Appreciation Rights (SARs), tax is typically paid when the value is realized, either in cash or stock, creating a deferred tax event.
• Tax Compliance: It’s essential to work with legal and financial advisors to navigate the specific tax regulations governing equity-based compensation in private companies. Proper planning helps ensure that tax burdens are minimized and employees aren’t caught off guard by unexpected liabilities.

3. Retention Benefits and Talent Acquisition

An effective LTIP is one of the most powerful tools private companies have for attracting and retaining top talent. Since private companies often can’t offer the same level of liquidity as public companies, LTIPs play a key role in motivating employees to stay long-term and contribute to the company's growth.

• Retention: By linking financial rewards to long-term company performance, LTIPs create an incentive for employees to stay with the company over several years. Vesting schedules ensure that employees remain engaged and committed, knowing their efforts will be rewarded as the company grows.
• Attraction of Top Talent: The promise of long-term financial gains, whether through equity or cash rewards, helps make a company more attractive to highly skilled professionals, especially in industries where talent competition is fierce.
• Employee Ownership: Offering equity-based incentives instills a sense of ownership, encouraging employees to act like stakeholders in the company’s success and motivating them to work harder toward long-term business goals.

4. Alignment with Strategic Business Objectives

LTIPs must be designed to align directly with a company’s long-term strategic objectives. If the compensation structure doesn’t reflect the goals and vision of the company, it will not drive the behaviors needed for sustained growth.

• Goal Alignment: The performance metrics tied to LTIPs—whether they are revenue growth, market expansion, or profitability—should be directly linked to the company’s long-term strategy.
• Company Growth: As the company grows, the incentives tied to LTIPs must also evolve. Equity-based rewards should become more valuable as the company’s value increases, ensuring that employees remain motivated to contribute to these growth milestones.
• Scalability: It’s essential to design LTIPs that are scalable as the company grows. What works for a small start-up may need to evolve as the company moves into different stages of growth or experiences major changes such as a funding round, acquisition, or IPO.

Having addressed these critical design elements, the next step is execution. Effective implementation is essential to ensure LTIPs deliver their intended benefits and drive lasting engagement.

Implementation Best Practices for LTIPs

Successfully implementing Long-Term Incentive Plans (LTIPs) requires a structured, thoughtful approach to ensure they are both effective and sustainable. Below are best practices that help ensure the smooth execution of LTIPs in private companies:

• Align LTIPs with Business Milestones: Ensure that your LTIP’s performance metrics are directly tied to key company milestones—whether that's revenue growth, profitability, or market expansion. These should align with your company’s strategic goals, motivating employees to contribute to the success of the business in measurable ways.
• Define Clear and Transparent Vesting Schedules: Clearly communicate vesting schedules to employees. LTIPs are often long-term commitments, so employees should know exactly when they can expect to access their rewards. This transparency reduces confusion and increases employee commitment.
• Customize Based on Roles and Contributions: Tailor LTIPs to different roles within the company. Not all employees have the same level of influence on company success, so aligning compensation to performance in a way that reflects individual and team contributions ensures fairness and engagement.
• Simplify the Process with Technology: Leverage compensation management software to automate the tracking and execution of LTIPs. Real-time visibility into performance, vesting timelines, and equity values helps HR and Finance teams manage these plans with efficiency and accuracy.
• Regularly Review and Adjust: Periodically evaluate the effectiveness of your LTIPs. As your company grows or as market conditions shift, you may need to adjust the structure, performance metrics, or payout mechanisms to remain competitive and aligned with business goals.

Conclusion

Implementing Long-Term Incentive Plans (LTIPs) is an essential strategy for private companies seeking to align employee efforts with long-term company success. By customizing LTIPs to your strategic goals, defining clear vesting schedules, and leveraging technology to streamline the process, your organization can create a compensation model that motivates employees, rewards their contributions, and supports sustainable growth.

However, the complexity of managing LTIPs requires more than just a structured approach—it requires the right tools and insights to ensure accuracy, fairness, and alignment with business objectives. This is where CandorIQ comes in.

CandorIQ offers a unified platform that simplifies compensation planning, including the design and management of LTIPs. Our advanced tools provide real-time data, automate tracking, and ensure transparency throughout the entire process. From equity management to performance-based rewards, CandorIQ empowers HR and Finance teams to create LTIPs that align with both employee goals and business milestones. With our AI-driven insights and streamlined workflows, you can confidently manage your LTIPs and drive long-term employee engagement.

Empower your workforce, align your goals, and drive long-term success with CandorIQ—where strategic compensation meets real impact!

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