Consider this scenario: a game studio promotes its Lead Producer, awards her a competitive salary and a new, larger annual bonus opportunity, then loses her 18 months later to another company that is offering equity and headed for a sale. The pay was robust. However, nothing in her compensation package took a long-term view with the potential to provide compensation at a public offering or exit. A retention tool was missing. So, when someone offered her a stake in potential financial upside, she took it.

A long-term incentive plan has long been considered the “third leg” of a three-legged compensation tool. Salary pays for agreed upon activities specified in a job; annual bonus is designed to recognize achievements for the year that contribute to the company and that were considered above and beyond the role. The “third leg” is the long-term incentive plan. Long-term incentive plans (LTIPs) reward outcomes that take place for periods greater than one year, rewarding value created over time; they are designed to keep the people creating that value from leaving partway through that time.

This guide covers what an LTIP is, the main types of plans, and the designs that more effectively retain talent or simply add cost. It also outlines how plans differ by a company’s industry and ownership structure, particularly in entertainment, gaming, and technology. Croner advises organizations across these industries on both benchmarking, short-term and long-term incentive plan design, and the trends below reflect findings from that work.

What Is a Long-Term Incentive Plan?

Long-term incentive plans measure performance over multiple years and have vesting schedules. These plans are structured to deliver rewards over multiple years, usually three to five, rather than in a single fiscal year. A long-term incentive provides more than this: it rewards results that take more than one year to achieve, and it asks the recipient to stay until the results are achieved.

Almost all LTIP awards require continued employment and the achievement of performance goals. The vehicle types vary widely, from stock options to restricted stock units to long-term cash. A good plan retains, aligns, and rewards its participants. These objectives do not always point in the same direction. For example, a plan that is highly performance-based may create strong alignment but may be less effective as a retention tool if goals are viewed as unrealistic. A well-designed plan balances these priorities in a way that is clear, competitive, and appropriate for the organization’s stage, strategy, and talent needs.

Long-Term vs. Short-Term Incentive Measures

Well designed compensation programs balance short- and long-term incentives, to cover different time frames and to focus on measures that neither overlap nor conflict. Short-term incentive plans, typically in the form of an annual bonuses, are measured and paid within the year and include near-term operating goals such as revenue, profit, earnings or cash flow, as well as individual goals that support these measures. Long-term incentive plans cover and emphasize slower-to-achieve outcomes such as stock price growth, total shareholder return, a multi-year strategic shift. When offered, senior roles have a greater percentage of their pay in long-term incentives, because they have a more direct impact on long-term results.

The Primary Types of Long-Term Incentive Plans

No single structure fits every company, and most organizations offer more than one type of long-term incentive plan vehicle. These are the prevailing plan designs.

Stock Options

A stock option is the right to buy shares at a fixed price, the strike price, once the option vests. It pays only if the share price is greater than the strike price. Options reward stock price growth only. Two forms dominate. Incentive Stock Options (ISOs) can carry tax advantages for employees but come with statutory limits. Non-Qualified Stock Options (NSOs) are more flexible, can go to non-employees, and are taxed as ordinary income at exercise. The risk of stock options is familiar to anyone who has lived through a downturn: when the share price is below the strike price, the option is underwater and fails to motivate. (It also can have difficult tax consequences to those who have exercised, which we will cover in future blogs.) While stock options remain the prevailing award type in private and pre-IPO companies, in public companies, use of stock options are more limited and typically offered to more senior level roles, rather than all LTIP participants.

Restricted Stock and Restricted Stock Units (RSUs)

Restricted stock is a grant of actual shares the recipient cannot receive until the shares vest. Restricted Stock Units (RSUs) are a promise to deliver those shares, or their cash value, once vesting conditions are met. Holders of restricted stock often may receive voting rights and dividends during vesting and may file a Section 83(b) election which allows the employee to be taxed on the value of the award at time of grant, rather than vest, and once taxed, any further gains on the stock will be taxed at the lower long-term capital gains rate. RSU holders receive units only at vest and pay ordinary income tax on the value of the award at vesting. Unlike stock options which can go underwater, RSUs keep their value even if the stock price goes down or remains flat. This is why RSUs have become the prevailing form of equity award at large public companies across a wide range of industries including technology, media, entertainment and software games. This type of long-term incentive retains employees well as retain value. They offer less performance leverage than stock options or performance shares. There are no further performance requirements to achieve, other than to stay employed at the company.

Performance Shares and Performance Share Units (PSUs)

Performance shares and Performance Share Units (PSUs) are awarded only if the company hits defined stock price or operating targets over a set period of time, typically three years. The prevailing metric for stock performance is total shareholder return; prevailing operating measures include revenue growth, earnings growth, cash flow or specific strategic milestones. Because the reward depends on results rather than tenure, shareholders and shareholder advisory services favor them, and performance shares now account for the bulk of senior executive long-term incentives at public companies. The challenge with performance shares or units is choosing metrics that leadership can genuinely impact, then setting goals that, while stretch, can actually be achieved by the company. In a changing economic landscape, it has been challenging for companies to set multi-year performance goals and motivate plan participants to achieve them.

Stock Appreciation Rights and Phantom Stock

Stock Appreciation Rights (SARs) award the increase in share value between grant and exercise, in cash or stock, with no purchase required. Phantom stock does much the same, tracking a notional block of shares and paying out in cash or stock. Neither offers real equity, which is a draw for privately held companies or controlled companies, which can offer equity-like upside without diluting owners.

Cash-Based Long-Term Incentive Plans

Long-term incentives do not have to involve stock at all. A long-term cash plan pays a cash value when multi-year financial or strategic targets are achieved. Many cash plans are three-year plans offered to participants each year (e.g., a 2026 plan that looks at performance through 2028 is awarded in 2026, a 2027 plan that looks at performance through 2029 is awarded in 2027, etc.). Over time, long-term cash plan participants will have multiple plans in play, serving as a powerful retention tool. This type of plan suits companies where equity is impractical or ownership is closely held. Some companies that offer equity to senior level employees offer long-term cash plans to compete for critical talent that would receive equity at other employers, such as technology roles in media and entertainment. A cash plan is easy to understand and transact. While awards are taxed as ordinary income, no further transactions are needed to realize value. Participants also grasp cash right away, with none of the valuation guesswork equity can carry. That clarity counts for more than you might expect.

Why Ownership Structure Drives the Choice

Public or private is a major driver of plan design decisions. Public companies have liquid, traded shares, so RSUs, stock options, and performance shares work without friction, and top considerations are about dilution, share pool size, what institutional investors will tolerate, what Boards want to guide the company to attain, and attracting and motivating key employees.

Private company shares do not trade on a liquid market. Valuations are set either by the latest investment or through third-party valuations that consider company operating statistics on a schedule. Share prices are not determined by a trading market. Owners guard control and dilution closely. Also, often private companies have a low stock valuation, making stock options, with potential for material gains once on a public market, very attractive. So, early stage private firms most typically choose to use stock options. As private companies mature and/or have a longer view to a liquid long-term incentive, they often choose to award long-term cash or phantom equity that deliver awards without distributing ownership. Private-equity-backed companies go a step further, building profits interests units, or co-investment arrangements that pay out at a sale or recapitalization. How a company is owned shapes how its LTIP is built.

Designing an LTIP

The strongest long-term incentive plans consider multiple factors during design:

  • Purpose first. Is the plan intended primarily to retain key talent, reward long-term performance, build ownership, or share the value of a future transaction or exit? The answer helps narrow the appropriate vehicle type and design structure.
  • Should the plan be broad-based and include a larger employee population, or should it be focused on executives and other leaders who have the greatest ability to influence long-term company value?
  • Time-based vesting supports retention. Vesting periods are often three to five years, although the length and schedule can vary. A one-year cliff followed by monthly or quarterly vesting is common. Performance-based vesting, by contrast, is intended to reward achievement of specific results. Many plans include both time- and performance-based elements.
  • Metrics you can defend. Keep performance metrics measurable, within leadership’s reach, and tied to how the business creates value. Two or three strong metrics are recommended. Shareholders prefer that performance metrics are aligned with their interests, emphasizing the importance of total shareholder return.
  • Award sizes. Benchmark grant values against position-specific data for your industry and company stage, not against broad averages. LTIP prevalence and size vary by sector and ownership type, and missing the market here means either over granting or failing to retain.
  • Cost and dilution. Model both before launch. Public companies watch burn rate (percent of the available pool awarded each year) and overhang (percent of total shares outstanding in the hands of employees through the LTIP award pool). Private companies watch the percentage of total shares outstanding and potential enterprise value that the plan commits to employees.
  • Governance and claw backs. Ensure Compensation Committee oversight and build in award recovery provisions to reduce risk, now a baseline expectation for listed companies. Articulate treatment of stock under various “good” termination scenarios, particularly for executives.

Where LTIPs Go Wrong

Watch out for these design challenges. Single-metric plans that reward the wrong outcomes, or pay out for reasons that have little to do with meaningful company performance. Awards that are not informed by market data on competitive practices, resulting in guidelines that are too large or too small. Eligibility that is too broad can also dilute the value of the plan. If too many participants are included, particularly employees who do not understand the award, cannot influence long-term value creation, or simply view the LTIP as another form of cash compensation, the plan may lose some of its strategic purpose. Eligibility should reflect both retention needs and the ability of participants to affect long-term company performance.

Vesting design can create its own challenges. Vesting that emphasizes too much of the near term, conflicting with a signal that this compensation element is for a longer-term horizon. Vesting that is too long, resulting in a horizon that does not “feel real”, is quietly discounted. Then there is the plan that no one understands, which makes a potentially valuable award lose its ability to drive (and reward) important outcomes, because no one is motivated by an award they cannot explain. Finally, not considering the tax treatment of each vehicle can result in unintended burdens on plan participants.

Every one of these challenges is addressable upfront, if you are aware of them.

LTIPs in Entertainment, Gaming, and Technology

These related yet diverse industries show why one template will not do. Many studios, game developers, and technology companies are private, owned by international parent companies who have different approaches to stock, or are private-equity-backed. In these cases, equity is harder to grant and dilution is a concern. Others are, or are parts of, large, public companies who can offer stock. While technology companies generally offer stock to most employees, entertainment and gaming do so but at senior levels of the company. For these, the competition for engineering, product, and specialized creative talent persists often requiring use of stock for these special groups to enable attracting and retaining these critical functions. Long-term cash, SARs and phantom equity may help in these special cases.

Tax and Accounting, Briefly

Every long-term incentive carries tax and accounting consequences worth considering before designing the plan. Incentive Stock Options (ISOs) can have more favorable tax treatment than Non-Qualified Stock Options (NSOs), but ISOs have more restrictions. Restricted stock (with the possibility of the Internal Revenue Code 83(b) election) can have more favorable tax treatment than RSUs. Deferred arrangements must be compliant with Section 409A of the Internal Revenue Code, which governs the timing of non-qualified deferred compensation. Equity awards also create a compensation expense for companies. Given the importance of designing plans well for compliance and preferable tax treatment, we recommend to all our clients that plans be built in consultation with qualified tax, legal, and accounting advisors. Seek legal and tax advice as part of every long-term incentive plan design.

What 2026 Brings

The priorities of the Securities and Exchange Commission, which sets rules for plans to enable listing on exchanges, shift with SEC leaders’ philosophies. Until recently the SEC has required additional provisions to strengthen and reduce risk – or giveaways – in compensation plans. For instance, compensation recovery (claw back) rules for listed companies are in force now. Some years ago, the SEC required pay-versus-performance disclosures that demonstrated graphically whether long-term incentives actually track with results. In addition, wider pay transparency requirements are reshaping how employers report out their ranges and incentive opportunities.

The federal claw back framework is laid out on the SEC’s compensation recovery rules page (opens in a new tab).

At this time, there is a shift in philosophy at the SEC, which is contemplating reducing disclosures for selected categories of companies. And the contest for technology, product, and emerging artificial intelligence talent drives the need for flexibility and retention.

In this changing time, it is critical to be aware that plans still need to be compliant, while selected reporting requirements may be eliminated. This awareness needs to span the Compensation Committee to Human Resources and Compensation departments staff.

If you have already pressure-tested your plan design, benchmarked your award levels, and documented governance and compliance, any new shifts in policy become manageable with confidence.

Working With a Compensation Advisor

Designing a long-term incentive plan appropriate for your company requires solid market data and the judgment to apply them to one specific company, at one specific stage, in one specific industry. Croner pairs position-specific survey data with long-term incentive plan consulting experience across entertainment, gaming, technology, animation, and nonprofit organizations, helping clients choose the right long-term incentive vehicle, award sizes, vesting provisions, and performance conditions that hold up. To talk through your LTIP design or benchmark the plan you already offer, connect with Croner’s compensation consulting team. For related reading, see our guides to annual incentive plan design and executive compensation.

Frequently Asked Questions

What does LTIP stand for?

LTIP stands for long-term incentive plan, a form of compensation that is earned and paid out over several years, usually three to five, rather than within a single year.

What is the difference between an LTIP and a bonus?

A bonus, or short-term incentive, is generally measured and paid within one year and tied to annual goals. An LTIP runs over several years and rewards longer-term performance and retention.

What are the most common types of long-term incentive plans?

The common LTIP vehicles are stock options, restricted stock and restricted stock units (RSUs), performance shares or performance share units (PSUs), stock appreciation rights and phantom stock, and cash-based long-term incentive plans.

What is a typical LTIP vesting period?

Most long-term incentive plans vest over three to five years. They use time-based schedules for retention, performance-based conditions for awards tied to results, or a combination of the two.

Why do private companies use different LTIPs than public companies?

Private companies have illiquid shares and tend to protect ownership and control, so they often use cash LTIPs, stock appreciation rights, or phantom equity to deliver upside without distributing real shares or diluting existing owners.