Ask an Adviser: What is a long-term incentive plan and how can it help us?

Welcome to Ask an Adviser, EBN’s weekly column in which benefit brokers and advisers answer (anonymous) queries sent in by our readers. Looking for some expert advice? Please submit questions to askanadviser@arizent.com. We asked Bartek Podolski, co-founder and CEO of GGS IT Consulting, to weigh in on the following: What is a long-term incentive plan and how can it help us?

Soaring inflation, labor shortages and increasing pay competition are currently the top concerns for most companies. Firms compete with each other by offering salary raises that will erode. But you can attract and keep talent by offering your employees real value: a long-term incentive plan (LTIP) is a winning formula for professionals and companies alike.

LTIPs are a form of a variable pay awarded for work carried out in the present but deferred to the future. It is based on performance and spread over a vesting period that runs for three to five years.

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In today’s disruptive environment, companies stuck between skyrocketing inflation and the Great Resignation can turn to LTIPs, which can help in a number of ways. These plans promote employee retention since the award is disbursed only after the vesting period. If the recipients leave or are terminated during that time, they forfeit the bonus.

LTIPs also are a better alternative to cash awards because they preserve value. The grant is based on company stocks, and since on average the market beats inflation, the employees receive an award that won’t be devalued. Moreover, LTIPs are a form of attraction and recognition of your talent. By offering ownership to key figures, you compel them to act like owners, encouraging decisions that will benefit the company long-term.

And from the business perspective, deferred performance-based rewards mean you don’t need to put up cash for salaries upfront, helping preserve P&L statements in times of inflation.

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Contrary to conventional thinking, LTIPs are not just for the C-suite. Many companies are starting to grant them to employees below the executive level. Yet since only 20% offer LTIPs to professionals other than CEOs, you have a good chance to be at the forefront of this trend and positively differentiate yourself from the competition.

Estimates show that by 2025 firms expect to lose $8.5 trillion in unrealized revenue because of skills shortages. The competition for talent will only get worse. Experienced employees equipped with unique skills are an asset that will define the future winners of this disruptive period. Forward-thinking companies aspiring to be the champions of this transformation must develop their current workforce and be able to keep it. LTIPs are one of the means of doing just that.