Authors: Mylène Legault Dominic Girard
The benefits of a long-term incentive plan (LTIP) have been widely demonstrated. An LTIP is a program that pays cash and/or shares — real or phantom — based on criteria such as time passed or predefined performance criteria. The primary goals of LTIPs are to:
- Align executive and shareholder interests.
- Link compensation to the organization's performance.
- Retain key employees.
LTIPs are becoming more common in both private and parapublic organizations, and communicating the plan to participants is crucial to achieving the desired effect. Participants often perceived LTIPs as too complex, and they have difficulty understanding the mechanics of the program, their own impact on results and the influence they have on payouts.
In addition, progress towards achieving objectives often isn't communicated regularly, leaving too much time between award and payout. As a result, participants don't have the tools to track the progress of results and to fully understand the impact.
Why do we need to communicate?
Participants sometimes don't understand LTIPs, which warrants regular communication, framing the program better and ensuring that participants understand the objectives, which will promote participant retention and motivation.
Communication conveys the organization's messages. For example, it may help to share financial results through the LTIP and thus make participants feel involved in the organization's long-term success. More importantly, communication helps remind participants at critical times of the potential for long-term gain. An LTIP with insufficiently communicated results can lose its retention effect, because participants tend to forget about it until payout or to underrate its potential value.
Finally, communicating an LTIP effectively can help demonstrate recognition for participants, thereby increasing employee motivation.
What to communicate to participants?
While communication can have a positive impact on the LTIP's goals, it's essential to determine how much information to disclose.
Tailor the amount of information to be communicated to the organization's strategy. It may vary depending on various considerations, such as the level of employee participation in the LTIP, the number of participants, the level of transparency in current employee communications, vesting-related criteria, the current and desired frequency of communications, and variability in financial results (cyclical or stable).
In all cases, organizations benefit from making information easy for participants to understand and from taking time to make the message clear. The more participants understand, the more likely the LTIP is to meet the organization's goals.
When to communicate?
Communicate the LTIP before the first award so that the goals and mechanics are properly understood — the award letter only serves to confirm the information previously mentioned. Follow up periodically so employees are aware of how results are progressing.
It's also crucial that employees can ask questions at any time using a simple, effective and familiar process. Several methods can be used, and it is the organization's responsibility to properly select the method that meets employees' needs of and aligns with the communication strategy.
What tools can be used for communicating to employees?
Several communication methods can be used to help participants understand their LTIP, depending on the strategy:
- A document that explains program details, such as mechanics, vesting, payout, performance criteria and valuation formula
- An explanatory video from senior management
- One-on-one meetings
- A forum or email contact for asking questions
- Email communication at each critical stage of the cycle, at least annually
- Annual meetings or statement of results/performance
- An online platform for tracking progression of awards
Conclusion
LTIPs are useful compensation tool for retaining and engaging key employees, and they're relatively simple to implement. Employees who are offered the privilege of participating in an LTIP will be strongly motivated to contribute to the future growth of their organization. However, a good communication plan is necessary for participants to understand the program and for the investment to be profitable for the organization. While this advice may seem self-evident and easy to implement, it requires time and work for many stakeholders and an effective dissemination plan.
Contact us to discuss the various options available to you to retain your best employees and effectively communicate your compensation plans.
