Page 416 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8

Long-Term Incentives

T he essential difference between long-term and short-term incentives is the
length of the performance period; whereas short-term incentives are typically
one year, long-term incentives are multiyear in nature. Some would further
break up long-term incentives into midterm (e.g., three to five years, such as
restricted stock and performance unit plans) and long term (e.g., more than five years, such
as stock options and SARs). However, this chapter will combine these latter two categories
under “long-term incentives.”
Plans that use company stock are submitted to shareholders for approval: typically those
settled in cash are also submitted. Plans that permit multiple use of stock (e.g., options,
appreciation rights, and awards) are typically called omnibus plans. Cynical shareholders
sometimes call them ominous plans.

IMPORTANCE OF TYPE OF COMPANY

The type of company definitely affects the importance of long-term incentives within the
company. While very important in for-profit companies, they are virtually nonexistent in
not-for-profits. In the for-profit sector, publicly traded companies with publicly traded stock
are at an advantage over privately held stock companies. This is due mainly to the more
restricted market for securities. Shown in Table 8-1 is a variation of Table 1-16 (Chapter 1)
and Tables 6-1 and 6-2 (Chapter 6). Publicly traded for-profit companies (unlike privately
held or not-for-profits) place high emphasis on long-term incentives in the threshold and
growth stages.
Plans use either a form of stock and/or cash. Stock plans may consist of publicly traded,
privately traded, or not traded (i.e., formula calculated). Each can consist of full value or
appreciation only. The full value may or may not require an investment on purchase by the

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