As the Great Resignation and War for Talent continue through
2022, executive compensation remains a critical topic among corporate boards.
Prior to a growing trend of compensation reform measures for executives, the
general compensation model was based entirely on the individual’s status rather
than their performance over time. This was, at one point, thought to be the
most accurate measure for additional compensation, as the executive’s status
would reflect their skill set and capacity to execute change. However,
long-term incentive plans (LTIPs) are growing in use due to volatility shown on
the global stage, impacting every area of business.
Beyond the pandemic, new tensions have emerged around the
Russian-Ukrainian crisis, putting strain on every global industry. These events
further highlight the efficacy and utility of LTIPs in this type of setting, as
ideal motivational tools for executives to continue to strive to go above and
Rather than having a compensation scheme based solely on
individual performance, choosing a strategy that requires both organizational
health and accountability can assist organizations in avoiding overpayment for the
actual difference that is being made by the executive. That’s why LTIPs for
executives are on the rise in 2022.
The utility and effectiveness of the LTIP for executive
compensation is only as strong as the design framework in which it is placed.
Companies and compensation specialists must create a flexible need that is both
within reach and motivational to corporate executives in their zone of
excellence. This requires a more nuanced approach than a ready-to-use or
LTIPs should be customized to every executive they serve,
even if they follow the same basic framework tenets. There should also be
additional acknowledgment and room for dynamic results due to the increasing
instability at a global level.
This article examines the top LTIP trends seen in Equilar’s
latest Executive Long-Term Incentive Plans report, designed to guide
compensation specialists in creating the most competitive, comprehensive and
advantageous LTIP plans possible while serving the strategic needs of their
The market trends lean more favorably toward relative total
shareholder return (TSR), a metric standard for LTIPs that has consistently
dominated other types, such as overall revenue or return on capital (ROC),
between 2020 and 2021. Post-pandemic, the use of TSR as a metric hit a total
prevalence of 65.7% as the main measure of success within Equilar 500—the 500
largest U.S. companies by revenue—CEO LTIP design framework (Figure 1). This
trend continues to race toward a more positive use case, shown by its momentous
13 percentage point jump from 2017.
This leaves many organization leaders with the question: Why
is TSR such a favorable design element within a C-suite LTIP?
The concept is that TSR provides a more “close-to-home”
measure that accurately shows the effects on stakeholders in the long term. It
also is a tool that can help to fairly gauge the amount of positive attributed
change that an executive has brought to a business, removing the additional
outside factor of global dynamism as much as possible.
ROC as a metric came second only to TSR. However, there is
increasing data that shows that ROC may be a less desirable contributing factor
in LTIP creation over time.
While the goal of LTIPs is to indicate the organization’s
health and true market mastery within a given year, data shows that it
continues to empower professionals to overdeliver and pursue new frontiers of
success within a given company or brand.
Organizations continue to set exceedingly high standards and
expectations that a professional must attain before becoming eligible for their
first LTIP payout, using a preferred zone of achievement that looks different
in every organization. Equilar dug deeper to see if it was possible to find a
medium range that most listed organizations preferred to attain before
releasing the first payment.
Data shows that award payouts for Equilar 100—the 100
largest U.S. companies—CEO LTIPs were most commonly triggered when performance
hit 80% and capped when performance hit 120% of target, with 84 of the 119
metrics falling within this range (Figure 2). This means that the individual
must reach approximately 80% of the target goal prior to triggering the
benefits that they are offered through the LTIP.
Additionally, the tiered structure of an LTIP further
incentivizes the executive to outperform the company’s prior set of targets and
goals. This is evidenced by the variable performance ranges that extend past
100%. In fact, many Equilar 100 companies worked within this type of a
structure, featuring up to 61 separate metrics that offered a payout at or
above the 100% performance range.
In this report, Equilar sought to find the new, driving
metrics behind some of the most succinct and efficient LTIP frameworks within
successful organizations. LTIPs provide the benefit of added flexibility and
accommodation for what is going on beyond an executive’s scope of control
within the industry—and continue to effectively motivate and empower them to
create top-down change within an organization.