Long-term and Short-term Incentive Plans
Employers often use incentives to encourage and reward (or punish) employee performance. Executives in New York may receive variable compensation by participating in long-term and short-term incentive plans. Generally, short-term incentives are formula-driven awards that are provided over a period of a year. Long-term incentives are usually provided to induce an executive to achieve results over a period of longer than one year. Often, they are paid in stock. Sometimes executives receive a balance of short- and long-term variable compensation. At Phillips & Associates, our New York City executive compensation lawyers can help you determine a plan that works for you.Long-term Incentive Plans
Incentive compensation programs are based on the idea that rewards drive employee behavior. They are put in place to produce targeted results by rewarding employees who are believed to be responsible for the results. Generally, the incentive is tied to specific performance metrics or goals.
Long-term incentive plans usually give rewards that are not tied to company share price. However, an executive is usually required to fulfill certain requirements as proof of contributing to an increase in shareholder value. One type of long-term incentive plan is a 401(k) retirement plan. Businesses match a percentage of an employee's paycheck that goes into a plan, and there is a vesting schedule that determines the value of the contributions that an executive can take with them when leaving the company. The employer may, for example, keep part of its contributions over the first five years of employment, but once an executive (or other employee) is fully vested, they own their retirement plan contributions going forward. Another long-term incentive is stock options. Executives are allowed to buy company stock at a discount with the employer paying off the balance. Another long-term incentive with which our attorneys are familiar is restricted stock.
Long-term incentives are often a large portion of executive pay. For median S&P 500 companies, they make up more than 60% of executive pay. The objective for an employer paying a long-term incentive is to provide a reward for executives that helps achieve the corporation's objectives with regard to maximizing value for shareholders. Often, long-term incentive compensation is a mix of equity and non-equity compensation, provided in the forms of stock options, performance shares, restricted stock, cash, and stock-settled performance units. Performance periods for long-term incentives are usually 3-5 years. An executive will not be paid from the incentive until the performance period ends.
Long-term incentive objectives can vary significantly but are usually structured to target a specific level of performance. They may involve a return to shareholders, but they can also include earnings per share or return on assets. An executive can usually get a greater long-term incentive by achieving a superior performance.Short-term Incentive Plans
Short-term incentives also take different forms, but critically, they are usually related to rewards for a year or less of work. One type of short-term incentive is an annual incentive plan for achieving certain results that are identified at the start of a performance cycle. These short-term incentive plans are different from bonuses because they are usually not discretionary.
Discretionary bonus plans are plans in which management decides the size of a bonus pool and how much to allocate to an executive (or other employee) after a particular performance period. These plans do not pay out based on a pre-determined formula. There is no guarantee of payment.
Profit sharing plans are another type of short-term incentive. This is a plan whereby you share in your company's profits over a set period. A formula is followed in order to allocate the profits.
Other forms of short-term incentives include a spot award, which usually recognizes an achievement with regard to a specific task or project, and gain sharing plans, which share the results of gains in productivity.Get Advice from an Employment Lawyer in New York City
If you are an executive in New York who is concerned about how long-term and short-term incentive plans can affect you, you should consult an experienced employment attorney. Contact Phillips & Associates at (833) 529-3476 or through our online form for a free appointment. We handle employment and whistleblower litigation in the Bronx, Queens, Brooklyn, Staten Island, and Manhattan; Westchester, Nassau, and Suffolk Counties; as well as Princeton, New Jersey, and Philadelphia, Pennsylvania.