In 1995 the Greenbury report recommended that UK companies should adopt performance-related LTIPs for senior executives over traditional share options. Since then, they have been widely adopted in the UK, and by 2012 they comprised nearly 50% of the total earnings of the executives in the FTSE 350. Similarly, the 2010 data from the US shows that already back then 48% of Fortune 500 total executive salaries were in some form of LTIPs, while nowadays, the median for the S&P 500 companies amounts to over 60% of the total package, and the variable pay as a form of compensation is used by 79% of companies as of 2022 Payscale's survey. More recently, they are becoming increasingly popular in France, Germany, and other parts of Western Europe as well as in large companies in China and India.
In today’s market, there is no doubt that they are an expected and fundamental form of the C-suite compensation package. As one of the surveyed CEOs put it, financial incentives are “a necessary but not sufficient condition for motivating executives,” and if they feel they are underpaid compared to their peers from other organizations, there is nothing that can compensate for that lack.
In fact, the rivalry among the referent group, so-called “scorekeeping” is one of the driving forces behind the executives’ motivation. Competitive by nature, valuing achievement, power, and status they simply enjoy to prove themselves, and performance-based long-term incentive plans are the major means of doing so. In this way, although quite costly, long-term incentives indirectly align the shareholder objectives with those of the executives, ultimately benefiting the company by creating value and wealth.
As we are entering an uncertain post-pandemic competitive market, no company can afford to take eyes of their targets that are also contingent upon their leaders’ performance. Well-designed LTIP crafted to suit your organization’s particular goals should be a fundamental element of each company’s long-term strategic thinking. Correctly deployed long-term incentive plan will ultimately help you achieve the operational goals, maintain human capital, and ensure successful succession planning.