long-term incentive plan

long-term incentive plan (LTIP)

a scheme which involves the periodic grant of SHARES in a company to the company's executive directors as an incentive for them to improve the financial performance of the company and align their interests more closely with those of the company's SHAREHOLDERS. LTIPs are similar to EXECUTIVE SHARE OPTION SCHEMES insofar as they involve the periodic grant and exercise of share awards, again the exercise of share awards being conditional on the attainment of specified performance ‘targets’ usually over a three year period. However, there are some notable differences. Firstly whereas options are granted at an ‘exercise price’ LTIP shares are usually granted at zero price (ie. they are given ‘free’). Secondly, ‘benchmarking’ is related specifically to the performance of other companies rather than the Retail Price Index, for example companies comprising a SHARE PRICE INDEX such as the FTSE-100, or more narrowly, a peer group of companies operating in the same industry. Thirdly, whereas options are exercised on an ‘all or nothing’ basis LTIPs are typically ‘scaled’ involving a minimum (partial exercise) point, rising to a maximum (full exercise) point. See PRINCIPAL-AGENT THEORY, BUSINESS OBJECTIVES, CORPORATE GOVERNANCE.

long-term incentive plan (LTIP)

a scheme that involves the periodic grant of SHARES in a company to the company's executive directors as an incentive for them to improve the financial performance of the company and align their interests more closely with those of the company's SHAREHOLDERS.

LTIPs are similar to EXECUTIVE SHARE OPTION SCHEMES insofar as they involve the periodic grant and exercise of share awards, again the exercise of share awards being conditional on the attainment of specified performance ‘targets’, usually over a three-year period. However, there are some notable differences. Firstly, whereas options are granted at an ‘exercise price’, LTIP shares are usually granted at zero price (i.e. they are given ‘free’). Secondly, ‘benchmarking’ is related specifically to the performance of other companies rather than the Retail Price Index, for example, companies comprising a SHARE PRICE INDEX such as the FTSE-100, or, more narrowly, a peer group of companies operating in the same industry. Thirdly, whereas options are exercised on an ‘all or nothing‘basis, LTIPs are typically ‘scaled’, involving a minimum (partial exercise) point, rising to a maximum (full exercise) point.

For example, in the case of GKN (2004), the engineering group, LTIP share exercises are based on the company's total shareholder return (TSR) (increase in share price with dividends re-invested) performance relative to that of companies comprising the FTSE-100 share index over three years. ‘Minimum’ share exercises are triggered if the company's growth in TSR is such as to place it in 50th position, rising to ‘maximum’ share exercises if the company's TSR growth is such as to put it in the top 25. For Allied Domecq (2004), the hotels and leisure group, the company's TSR is measured against that of 13 other hotels and leisure groups over three years. ‘Minimum’ share exercises are triggered if the company's TSR growth is such as to place it in the ninth position, rising to maximum share exercises if the company is in the top three. See PRINCIPAL-AGENT THEORY, FIRM OBJECTIVES, CORPORATE GOVERNANCE.

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