July 22, 2008
LTIPS: How to Select the Most Appropriate Time Frame
The typical performance-based LTIP runs three years, with performance being measured at the end of the period. A three-year time frame encourages a longer-term performance focus as well as retention. However, a three-year term requires the ability to identify longer-term goals with some precision, a process that is usually fairly standard for large, stable or mature organizations.
The situation is different for smaller firms, high-growth companies and those likely to experience a major organizational change in the near future such as a sale or acquisition. Faced with uncertainty about their long-range performance, they are likely to be more comfortable adopting a shorter horizon that allows them to pinpoint the kind of realistic and predictable goals most likely to drive executive behavior.
As a way to add the long-term performance perspective favored by investors and encourage retention, those companies may incorporate a vesting period after the performance period is completed. Typically, companies in this situation might opt for a one-year performance period but also encourage a longer-term perspective through the use of graded vesting over the next two years.
– Melissa Means, Pearl Meyer & Partners