In the war for talent, many folks have quit their jobs and found higher-paying gigs. Organizations are finding new ways to retain longtime employees. Performance-based bonuses go a long way to keep workers engaged in the short term, but as employees move up in an organization’s hierarchy, it’s necessary to consider offering long-term incentives (LTIs).
Here, we will hone in on non-equity based plans and explore some of the standard metrics and measurement methods that dictate payouts.
Non-Equity Based Plans
Non-equity-based plans typically reward employees with cash rather than company stock, and the rewards are not related to stock performance. These plans are meant to reward longer-term organizational performance, usually over three to five years.
These LTIs motivate employees to consider the organization’s growth over time and avoid focusing too much on short-term financial success. Like equity-based LTIs, these plans are strong retention tools due to multi-year or longer-term reward payouts. But since these plans are not tied to stock performance, employees usually have more control over payouts.
Non-equity based plans can take several forms, such as:
Performance unit plans (PUP): A fixed number of “units,” each worth a certain dollar amount, are given as a reward. Based on how well a given employee has achieved their set performance goals by the end of the time period, the value of each unit can increase or decrease. For instance, if an employee’s performance goal were based on return on equity (ROE) over four years, with a target of 15% and a reward of 1000 “units” valued at $15 each, they would receive $15,000 (1000x$15). If the average ROE exceeded the 15% target and hit 17%, the employee would receive more than $15,000 (1000 units valued at $17 each for a total of $17,000).
Book value plans: The total reward amount is based on the change in the organization’s book value (total assets-total liabilities) over the measurement period. This LTI is more frequently used in private companies.
Multi-year performance plans: The total reward amount is earned in portions over each subsequent year, and are paid out piece by piece in each year.
Here are some of the common drawbacks that compensation professionals should be aware of when considering a non-equity based plan:
May cause less of a focus on performance in the beginning of the measurement period. Since rewards are usually paid out at the end of a given time period, employees may not be as motivated at the start of a performance cycle.
Employees may perceive that their rewards are being “held back” from them. Because of the long-term nature of many of these payout types, employees may not feel as rewarded early on.
Typically, only senior management is eligible to participate in these plans. Whereas equity-based LTIs might potentially be available to more employees, these long-term cash rewards are generally intended for senior
Deciding which long-term incentives are right for your organization vary widely depending on your business, organizational goals, and how you want to motivate and evaluate your employees.
Want to learn about other short- and long-term incentive plans available to engage employees in your organization? Download our whitepaper: Understanding STI and LTI Data.