Many companies supplement their employees’ base pay with additional Long-Term Incentive Programs (LTIPs). Long-term incentives reward workers for their loyalty to a company and their achievement of specific goals. This guide will provide an overview of today’s LTIPs, including some key considerations for those who receive them.

What Are Long-Term Incentives?

Broadly speaking, long-term incentives are a type of strategic compensation designed to reward long-term retention or the achievement of specific goals. LTIPs are designed to supplement an employee’s base compensation package and are typically offered only to senior-level personnel and executives.

In an age where employees change jobs every 4.1 years¹, long-term incentives can promote company loyalty and dedication to a goal. Shareholders may also appreciate a company whose employees share this common commitment, especially when these goals generate additional revenue.

Types of Long-Term Incentives

At Moxie, we’ve found that the vast majority of executives have some type of LTIP that included one or more of the following:

Non-Qualified Stock Options

Stock options allow employees to purchase a given number of a company’s shares at a set price, commonly called the “strike price.” Non-qualified stock options (NSOs) typically take three years to vest, after which you’ll have ten years to exercise your right to purchase stock at the strike price.

Employers like NSOs because they provide tax incentives when issued. Unfortunately for recipients, the value of this option is taxed as ordinary income when the option is exercised.

Restricted Stock Units

Restricted Stock Units (RSUs) are issued to employees through a vesting plan. This approach means that employees accumulate interest in a company, but the full value is not available until after the vesting period. There’s no timing involved, however, since the date of transfer is predetermined. You’ll also owe taxes on the date of transfer.

Performance Shares

Performance shares are shares of stock given to employees based on the company’s overall performance, or the achievement of specific employment milestones over a given period of time, usually three years.

Pros and Cons of Long-Term Incentives

In some ways, the advantages and disadvantages depend on whether you’re an employer or an employee. Employers and shareholders like LTIPs because they promote company loyalty and draw a straight line between shareholder value and employee performance.

Advantages of Long-Term Incentives

Employees themselves can expect to see the following benefits from long-term incentives:

• More money through investment options
• Recognition of positive performance
• Acknowledgment of their loyalty to their company

Basically, LTIPs connect your hard work to long-term gains. If you want to increase your investment portfolio, your employer can help you achieve this through these supplemental compensation plans.

Disadvantages of Long-Term Incentives

There are some disadvantages to LTIPs that should be carefully considered:

• Ties you to one company
• NSOs can expire with no real value (the stock price never exceeds the strike price)
• Stock options demand additional tax planning
• It can result if a heavy concentration of your net worth into one stock.

So, while long-term incentives can provide additional investment options, there’s no guarantee that some of your rewards will have actual value, especially given the volatility of stocks offered through NSOs.  However, if the stock value does increase dramatically, in brings with it the burden of diversification risk and the need for strategic tax planning.

Key Considerations for Long-Term Investments

Are long-term incentives part of your compensation package? If so, there are a few other things you might want to consider:

Personal Goals

As we noted earlier, LTIPs promote loyalty over flexibility. If you’re planning on sticking with your employer long-term, great. But if you’re hoping to change companies in a short period of time, these LTIPs might not be enough to anchor you to your current employer.

Tax Planning

One of the most common long-term incentives is stock options. The value of the option is regarded as taxable income by the IRS at the time of exercise.   Often you have flexibility on when you choose to exercise and pay the tax.

You may discover that you need to strategically manage option exercises and stock sales to mitigate your tax liability. A wealth management expert, in coordination with a qualified CPA, can help you run tax projections to evaluate your current strategy.

Investor Behavior

Larger amounts of money trigger emotions. However, it’s important not to allow emotion to dictate your investment strategy.  

We find that those who manage LTIPs well, have a well drawn-out strategy in advance.   We start with a financial plan.  The priority is to make sure that you have the funds to fulfill your plan—sticking to a disciplined liquidation and diversification schedule.   Once that in accomplished, then you can afford to take some additional risk with excess LTIP assets. 

Long-Term Investment Plans Are Here to Stay

In the wake of the “Great Resignation” of 2021, many companies are evolving their benefits to attract and retain top-level employees. LTIPs are likely here to stay. If you’re looking for advice on how to manage your investments, get in touch with our team today.

¹Source: Bureau of Labor Statistics: https://www.bls.gov/news.release/pdf/tenure.pdf

Separate  from the financial plan and our role as financial planner, we may recommend the purchase of specific investment or insurance products or accounts.  These product recommendations are not part of the financial plan and you are under no obligation to follow them.

Financial Professionals do not provide specific tax/legal advice and this information should not be considered as such.  You should always consult your tax/legal advisor regarding your own specific tax/legal situation. 4755909/DOFU 6-2022