In the world of equity compensation, the term “LTIP” refers to a “long term incentive program,” which is any type of payment or issuance of shares made to attract, retain, or motivate management and better align their interests with those of shareholders as a whole. However, for umbrella partnership real estate investment trusts, or “UPREITs,” “LTIP Units” have come to refer to awards of a particular class of limited partnership interests that benefit from an UPREIT’s relatively unique structure: a REIT that is taxed as a corporation that holds all of its assets through an operating company subsidiary immediately below the REIT, known as its “operating partnership,” that is taxed as a partnership. [1].
LTIP Units are comparable in many ways to other equity compensation awards made by REITs and other public companies to their directors, officers, employees, and other service providers that are payable in shares of the company’s common stock (or an amount of cash determined based on the value of such shares) and subject to time and/or performance vesting conditions LTIP Units, in contrast to these other awards, are set up as “profits interests” for taxation purposes, and as a result, typically come with two fundamental advantages and one fundamental risk:
How does a Long Term Incentive plan work?
What are the different types of LTIPs?
There are many types of LTIPs, including:
Stock options
Retirement Plans
A 401(k) retirement plan is a type of LTIP. To aid their team members in increasing their retirement savings, some employers give their workers the choice of having a certain percentage of their paychecks matched. A company might, for instance, promise to match employees’ retirement contributions up to 5% of their wages. This benefit may serve as a motivator for staff members to work for a company longer in order to increase their retirement income.
Cash
Companies occasionally use cash incentives to entice and keep workers. Additionally, it can aid in motivating staff members and managers to align their interests with the business’s.
What is an LTIP?
A long-term incentive plan is a type of compensation program where employers reward staff for achieving predetermined performance targets. By encouraging employees to not only perform well but also stay with the company through long-term financial compensation based on their ability to meet company goals, the program is intended to be advantageous to both employees and employers.
Employers provide LTIPs as a way to motivate staff to achieve the company’s desired goals intended to raise shareholder value. These objectives can differ between businesses and even between departments within the same business, and they can include things like hitting sales quotas and showing up on time each day.
Due to the important role that LTIPs can play for both the company and its employees, there is a symbiotic relationship. As the employee achieves their goals, the company’s value increases, allowing the amount received from the LTIP to increase.
When do employees get the benefits from LTIPs?
Since LTIPs encourage employee retention and reward long-term performance, the employee typically doesn’t get paid from the program until they:
The vesting schedule of the award will determine when you receive your entire incentive.
There are two main types of vesting schedules:
Aside from that, remember that an LTIP is not a one-time reward. It can be given to an employee and compounded annually, making it very lucrative and alluring to potential employees and a desirable hiring tool for employers.
What is an example of an LTIP?
A company releases its long-term incentive plan for its workforce. Employees must have been with the company for a minimum of three years in order to be eligible for the LTIP. At the beginning of each new fiscal year, they are then eligible to receive their incentive in the form of cash. As long as the company requirements were consistently met, the company chose a gradual vesting option of three years per performing period, which would have resulted in three overlapping LTIP performance periods at any given time once fully implemented.
The amount of the cash award varied depending on performance and was determined using a predetermined chart. Potential rewards were based on employment status. When target results were attained or exceeded, the company used a percentage system that increased the reward amount by a maximum of 400%.
Instead of a one-time incentive, like a holiday bonus, a new long-term incentive can be given to an employee each year through LTIPs.
Frequently asked questions about LTIPs
How are LTIPs taxed?
The shares acquired from the company are taxed once an employee starts receiving LTIP benefits and they have fully vested.
Who is eligible for LTIPs?
Each employer has their own requirements for how an employee qualifies for the LTIP. As long as they reach the company-set performance objectives, most employees become eligible for the benefits after three to five years.
FAQ
What is an LTIP and how does it work?
A company policy known as a long-term incentive plan (LTIP) rewards employees for achieving particular objectives that increase shareholder value. In a typical LTIP, the employee, who is ordinarily an executive, is subject to a number of conditions or demands.
Is LTIP a bonus?
The sum paid or earned in relation to an LTIP Award is referred to as a “LTIP Bonus.” Amounts paid to Participants under the Long-Term Incentive Plan are referred to as LTIP Bonuses. Relative Performance Awards and/or Strategic Performance Awards are two possible forms of LTIP Bonuses.
What is an example of a long-term incentive?
A share plan, an equity plan, or a cash plan are some examples of long-term incentives. Before an employee receives the full incentive under a long-term incentive plan, it can typically take three to five years.
How is LTIP taxed?
In general, the recipient of a non-qualified stock option granted under the LTIP is not subject to income tax at the time of grant. Non-qualified stock options are taxed when they are exercised, not when they become vested.
