RM2 > Employee Share Schemes > Long-Term Incentive Plan (LTIP)

Long Term Incentive Plan (LTIP)

What is a LTIP?

Long Term Incentive Plans (LTIPs) are essentially any share plans that operate on a long term basis. Typically, the phrase will apply to share schemes where shares are released to selected senior employees over a long period of time.

How does a LTIP work?

A typical structure for a LTIP would be a settlement of shares into an Employee Benefit Trust (EBT). The shares are then released on the achievement of pre-arranged performance and/or loyalty targets. Under rules concerning disguised remuneration, such arrangements should have a maximum life of 5 years. A company can in theory dispense with a trust and just release the shares directly to the participants. However if the arrangements are not correctly structured, HM Revenue & Customs may seek to assess tax on the present value to the recipient of the future conditional right to receive shares.

Under a bonus matching scheme, participants will give up some or all of their cash bonus in exchange for shares which are held for them in trust. The shares are released only if certain loyalty and/or performance conditions are met. A typical loyalty period will be three to 5 years. If the criteria are met, the participant may receive not only the reserved shares but also additional free shares.

What are the benefits of a LTIP?

LTIPs can deliver similar benefits to the participant as share options, but using fewer shares since the whole value of the share can be delivered. Also, LTIPs can never be underwater since shares can never be worth less than nothing. Share options can of course be granted with exercise prices less than market value or even at nil cost, but this is in breach of the ABI guidelines. 

Performance and time based conditions for LTIP share schemes

LTIPs are discretionary schemes, and as such companies can design them as they wish. However, quoted companies may wish to take account of guidelines issued by the Association of British Insurers (ABI). The guidelines are intended to ensure that any incentives are not excessive and reward genuinely superior performance.  

What are the disadvantages of a LTIP?

The recipient of an LTIP normally pays full income tax on the benefit when received and there will also be employer and employee NICs if the shares are quoted or are otherwise readily convertible into cash (the same treatment applies to shares in companies which are not independent). If the shares are sold and the proceeds are transferred into a self-invested personal pension plan, the recipient may be able to claim offsetting tax relief (subject to statutory limits and timing differences).

How long does an LTIP take to set up?

You should allow at least 8 weeks for design and processing.

How much does a LTIP cost?

We will take careful consideration of your individual requirements and objectives before providing a quote. In our experience, it is necessary to scope out the complexity of work involved with each share plan in order to offer an accurate quote. The reason for this is that we typically operate on a fixed fee basis, which allows us to be up front with our clients about the total costs involved with the process from the start, instead of being a meter running arrangement.

We are proud to offer a tailored service, and do not believe in a one-size-fits-all approach.

If you would like a free consultation to discuss how a LTIP may operate within your business, please contact RM2 directly on 020 8949 5522, or via enquiries@rm2.co.uk.