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For employees, LTI can be a reward for outstanding performance and are a vehicle for capital accumulation. For shareholders, LTI are a vehicle that aligns employees with the performance of shares (for market-based equity vehicles) and the long-term vision of the company.
An example of a long-term incentive could be a cash plan, equity plan or share plan.
LTI are typically granted with what is known as a vesting period. What this means is that grantees are conditionally granted equity, but they do not actually own it until the vesting period expires.
A stock incentive plan, or employee stock purchase plan, is a form of compensation by a company for employees or contractors which can be used as an alternative to cash payment. It's designed to motivate employees by offering them the opportunity for future earnings through company stocks.
Through LTIPs, a new long-term incentive can be granted to an employee every year, rather than a one-time incentive, similar to a holiday bonus.
An LTIP works by rewarding employees (usually senior employees) with cash or shares of company stock for meeting specific goals. The goals are usually long-term, running for 3-5 years to stimulate ongoing progress rather than a-few-months objectives.
Stock options are another type of LTIP. After a set length of employment, workers may be able to purchase company stock at a discount while the employer pays the balance. The worker's seniority in the organization increases with the percentage of shares owned.