Long-Term Incentive Plans (LTIPs) have changed dramatically in recent years as companies rethink how they reward and retain top talent. Not long ago, stock options were the mainstay of long-term incentive plans. Today though, companies are mixing things up with a wider variety of equity awards like RSUs, performance shares and even phantom stock. This change isn’t just about adding more choices, it’s a direct response to what both companies and their employees need right now, especially in fast-moving industries like tech and life sciences.
The Decline of Stock Options
Historically, stock options were the cornerstone of LTIPs, offering employees the right to purchase company stock at a predetermined price. This model aligned employee interests with shareholder value, incentivizing performance and retention. However, several factors have contributed to the decline of stock options as the sole LTIP vehicle.
- Accounting Changes: Regulatory shifts, such as the implementation of FAS 123(R), required companies to expense stock options, reducing their appeal.
- Market Volatility: Fluctuating stock prices have made stock options less predictable and potentially less rewarding for employees.
- Retention Challenges: Employees may find stock options less attractive due to the risk of options becoming “underwater” (i.e., the market price falls below the exercise price).
Embracing Diversification: RSUs, Performance Shares, and Phantom Stock
To address these challenges, companies have diversified their LTIP offerings:
Restricted Stock Units (RSUs)
RSUs grant employees a promise of company shares after a vesting period, without requiring them to purchase the stock. This provides a more predictable and less risky incentive, enhancing employee retention and satisfaction.
Performance Shares
Performance shares tie equity awards to specific company performance metrics, such as revenue growth or earnings per share. This aligns employee rewards with organizational success, promoting a performance-driven culture.
Phantom Stock
Phantom stock awards provide cash bonuses equivalent to the value of a certain number of company shares, without granting actual equity. This allows companies to offer equity-like incentives without diluting shareholder value, making it an attractive option for private or closely-held companies.
Benefits of a Diversified LTIP Approach
Adopting a mix of LTIP vehicles offers several advantages:
- Enhanced Retention: A diversified LTIP portfolio caters to varying employee preferences and risk tolerances, improving retention across different employee segments.
- Improved Motivation: Linking rewards to both tenure (via RSUs) and performance (via performance shares) creates a balanced incentive structure that motivates employees to contribute to long-term success.
- Alignment with Shareholder Interests: By tying a portion of compensation to company performance, diversified LTIPs ensure that employee interests remain aligned with those of shareholders.
For a deeper dive into how companies are structuring long-term incentive plans in 2025, including detailed examples of RSUs, performance shares, and phantom stock, check out this comprehensive Guide to Incentive Stock Options >>
The 2025 Landscape: A Strategic Imperative
As of 2025, the trend towards diversified LTIPs continues to gain momentum. Companies recognize that a one-size-fits-all approach to long-term incentives is no longer effective in attracting, retaining, and motivating top talent. By offering a combination of stock options, RSUs, performance shares, and phantom stock, organizations can create a more flexible and responsive compensation strategy that supports both employee engagement and shareholder value.
How Can ShareForce Help?
At ShareForce, we understand the complexities of designing and managing effective LTIPs. Our expertise in equity compensation solutions enables companies to navigate this evolving landscape with confidence, ensuring that their incentive programs are aligned with strategic objectives and market best practices.
For more information on how ShareForce can support your organization’s LTIP strategy, Click the button below to book a demo.
