Long-term incentives routinely comprise the biggest portion of an executive’s compensation. Companies offer long-term incentives to retain talent and encourage executives to realize the company’s strategic goals and objectives.
Long-term incentives are normally granted as some form of equity compensation, such as:
- stock options (the executive can buy or sell the company’s stock at an agreed (exercise) price within a set period of time)
- restricted stock shares/units (an award of stock with restrictions usually contingent upon working for the company a particular length of time)
- performance shares/units (an award of stock with restrictions often related to achieving company performance goals)
Typically, the equity grants will vest over a specific period of time, essentially making the executive an investor in the company’s performance. The vesting period varies by company but usually covers a period of 3 to 5 years. Long-term incentives that have not vested are typically forfeited once the executive departs the company.