Incentive compensation
Typical structures
What are the prevalent types and structures of incentive compensation? Do they vary by level or type of organisation?
Short-term incentive compensation (STI) is typically paid in cash either upon achievement of pre-established performance targets or on a discretionary basis. In some cases, STI awards are settled partially in cash and partially in equity awards that are subject to additional vesting conditions, such as in cash and restricted stock, effectively providing short-term and long-term incentives within the same arrangement. It is not uncommon for companies to maintain different STI programmes for executives and non-executives and, in certain cases, additional or alternative plans are maintained for other groups of employees to incentivise them with respect to specific aspects of the business, such as sales.
Long-term incentive compensation (LTI) usually takes the form of equity awards or equity-based awards that are settled in stock although sometimes LTI is denominated and paid in cash. Common types of equity and equity-based awards include stock options, stock appreciation rights, restricted stock, restricted stock units and performance stock units. Settlement of LTI awards in cash is significantly more prevalent in private companies than in public companies owing to the lack of a market for the equity and the desire to have a limited number of equity holders. LTI awards are typically payable upon achievement of...
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