NACD Directorship – It’s Time to Think Less Conventionally About Long-Term Incentive Plans

February 23, 2018

By Dayna Harris, Partner, Farient Advisors

In times of transition or business overhaul, the modern executive long-term incentive plan (LTIP) may be inadequate to support a business’s imperatives. On one hand, today’s typical plan is simple, and likely to garner support under say on pay with both proxy advisor firms and shareholders. On the other hand, a less conventional LTIP plan design may provide better support for achieving long-term objectives.

A typical LTIP usually has the following design elements:

  • A three-year performance period.
  • A relative total shareholder return (TSR) measure that either stands alone or is paired with a financial measure.
  • If a relative TSR measure is present, a financial measure such as a three-year earnings or earnings growth measure or a return on capital measure.

A less conventional LTIP, however, is hallmarked by strategic measures or focused financial or operational measures. These measures typically target something more specific than the company or the business unit as a whole. They also may include elements such as certain geographies, customer markets, and product lines.

In many instances, a typical LTIP is sufficient, especially when the company is doing well and on the path to achieving its long-term business strategy. At other times, a company might be better served by using an LTIP to focus the executive team on specific business imperatives that will sustain the company for the long term, particularly when the company is undergoing or in need of a major overhaul.

Further, a less conventional LTIP may be better suited in situations where a business is experiencing significant, if not radical, changes.

Thrive or Survive

From retail to healthcare to auto manufacturing, disrupted industries are making headlines every day. New entrants to many industries are bringing efficiencies or new products to market more effectively than ever before.

Brick and mortar retailers are struggling under the onslaught of well-established online retailers. Major auto manufacturers are recognizing that their strategies need to address electric vehicles and self-driving cars in a big way. Oil and gas companies are realizing the longer-term threat from renewable energy concepts, including hybrid and electric cars and the electric power industry with its promise of reliance on greener energy sources in the future. Healthcare service providers in the United States are attempting to plan strategies around shifting government policies and regulations to address increasing healthcare costs, patient affordability, and provider accessibility.

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