Long Term Incentive Plans (LTIPs) and Management Incentive Plans (MIPs)

What is a long term incentive plan (LTIP)?

Long Term Incentive Plan (LTIP) is a term that refers to delayed compensation strategies that a business may use to motivate employees over an extended period of time. It is a name that can be given to any form of long-term incentive that a company awards to its employees - a LTIP may reward employees with shares, cash or other commodities. 

LTIPs most often refer to employee share plans in listed companies with the following characteristics: 

• Shares will be delivered following the end of a performance period 
• Shares will only be delivered if stretching performance criteria are met 
• The employees will not be required to pay a strike price in order to receive the shares.

These structures are also often called ‘performance shares’ or, in the US, ‘restricted stock units’.  

The company can design the LTIP in whichever way it feels will give the most appropriate outcome for the staff, the company and the shareholders. Therefore, LTIPs may have very different characteristics and designs, but the overall premise will be to incentivise the management team and align the senior employees with the company’s business growth plan. A balance must therefore be struck between setting performance targets that are realistic and achievable and ensuring staff remain incentivised and motivated to contribute to increased shareholder value. 

What is a management incentive plan?

Management Incentive Plan (MIP) most often refers to the scheme in which the “sweet equity” pool is allocated to senior management in a privately owned business.  

Businesses using a MIP will often be owned by a private equity house. In this case, as the MIP is in a private company, it will be likely to vest the management participants on an ‘exit event’ – when the private equity house sells its stake in the business or there is another event such as an Initial Public Offering (IPO). 

If, on exit the investor or investors receive a particularly high rate of return on their investment, MIPs are often structured to provide a ratcheted return to the participants. MIPs are also commonly structured in a way that delivers a tax-efficient return to the participants - such as using growth shares or Enterprise Management Incentive share options. 

Of course, many other types of businesses use a MIP. There is no universally recognised definition of Management Incentive Plan and the only common thread is that it is targeted at the management team of a particular business – usually a relatively small group of the most senior team. As with LTIPS, a company can create a MIP in whichever way it feels will give the most appropriate outcome for management, the company and the shareholders.

Expert advice on Share Plans and Incentives

If you have any questions about LTIPs, or any other share plans for your business, please get in touch – our team of specialists will be happy to help you.
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