Long term incentive plans
Long term incentive plan (LTIP) is a widely used term that can capture arrangements (with many different forms) that are implemented by many different types of entity. While, there is no universally recognised definition of an LTIP, the common thread is that it is a plan that is measured or applied over a period that could be considered long-term in the context of the particular business.
LTIPs are often used to describe 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.
Such structures are also often called ‘performance shares’ or, in the US, ‘restricted stock units’.
LTIP is, however, just a name that can be given to any form of long term incentive that a company awards to its employees. An LTIP may reward and employee with shares, cash or other commodities such as cryptocurrency.
The company can design the scheme in whichever way it feels will give the most appropriate outcome for the staff, the company and the shareholders. Therefore, plans may have very different characteristics.
Management incentive plan
Management Incentive Plan (MIP) is a term most commonly used to refer to the scheme over which the “sweet equity” pool is allocated to senior management in a privately owned business.
The company 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 to the management participants on an ‘exit event’ – often when the private equity house sells its stake in the business or there is another corporate event such as an initial public offering of the company’s shares.
If the nature of the exit is such that 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. Read more on EMI.
Of course, many other types of entity 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.
We have significant experience in designing and implementing LTIPS, MIPS and other incentives to help companies in a wide range of sectors to meet their commercial objectives.