Why Long-Term Incentive Plans (LTIP) Donít Work Well


 
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Why Long-Term Incentive Plans (LTIP) Donít Work Well
Chloe Xu, Premium Member
A Long-Term Incentive Plan (LTIP) is designed to improve employees' long-term performance by providing rewards that are usually not tied to the companyís share price. LTIPs have been a key component of pay packages for executives for a long time. However, recent academic studies based on in-depth surveys with over 700 senior executives across 40 countries have found that executives don't appreciate and value them, and are not motivated by this component of their pay plans. Reasons why pay-for-performance incentives don't work well are listed below:
  • EXECUTIVES ARE MORE RISK-AVERSE THAN THEORY SUGGESTS. They are inclined to choose less risky options when they are being asked about their preference on pay packages and perceive an LTIP as 'extraordinarily complex' and even 'arbitrary'.
  • EXECUTIVES CARE MORE ABOUT PRESENT VALUE. In other word, an LTIP that may be worth a lot in three to four years is valued very little today. A study showed that executives...
 

 
 

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