Incentive programs / Incitamentsprogram
Lingo – around incentive programs. How to talk-the-talk (or just follow it)
Incentive programs are perhaps more popular than ever as they are a way to both create alignment of interest and to offer key personal competitive renumeration without having the liquidity to pay everything upfront.
Key for you being offered – or want to offer – an incentive program is to properly understand both what is being said and what is put on the paper you are asked to sign. All professions have their own jargon. And we all know that it can be a bit awkward to ask “what do you mean by that” when you are in deep and fast conversations about such things.
For one; ask what it (really) takes for you to ever get a return from the program you’re in. What are the targets/requirements, and what happens if you leave your job early? And for you offering the program – think about the attractiveness of the program and what behavior you want to drive. Do the terms (both overall and specific KPIs (jargon explained below)) really do the trick, or is there a risk that they drive the wrong behaviors and/or miss important areas? One common mistake is to only focus on easier metrics such as short-term financial results, and not properly look at long-term issues – sustainability is an area that is often left behind (LÄNK). Nonetheless, doing it right is – in my opinion – a fantastic and sustainable way of creating a co-creative and supportive environment within a company. If you share you get more.
So here is a short list of words commonly used in relation to incentive programs. Hopefully it gives you some insight into the structures and key issues that need to be addressed in relation to the programs (and some comfort as regards what is being discussed)
LTIP– Long Term Incentive Program. LTIP:s are programs where the award (often shares or options) is given to e.g. an employee over a longer period – typically 3-5 years. The value is often tied to the development of the company in some form. This can be made simple – e.g. shares in the company that vest over time, and automatically follow the company’s overall value development. But companies can also apply a more complex structure, where a number of KPIs will be tracked and weighed together to determine the size of the award at the end of a, or several, measurement period(s).
STIP– Short-Term Incentive Program. Same as LTIP but kept short - often a one-year period, and typically cash-settled.
KPI– Key Performance Indicator. Specific metrics that can be either qualitive; for example positive peer-to-peer reviews or quantitative; for example positive share price development.
Option. There are many kinds of options, but the core meaning of an option is a right to either buy (call option) or sell (put option) a particular security at predetermined price and terms at a future date.
Warrant. A right to subscribe for a share directly from the company. In many respects the same as a call option, but creates a new share when exercised.
Vesting. To earn shares/options over time. Typically, vesting means that you will only get to keep your shares/options if you “earn them” by remaining employed by the company during a “vesting period”. Vesting is often linear (if the vesting period is 4 years and you stay for 1, you get to keep 25% of the shares/options), but there are many creative alternatives.
Bad leaver. This is the scary one. Many programs state that if you leave the company (and become a “leaver”) on unfriendly terms, you risk losing all of your awards – sometimes even if they have vested. What makes you/the employee be seen as a bad-leaver will be defined by the one setting the program, but a common denominator is where you quit your employment and join a competitor.
Good leaver. When you leave without being a bad leaver. Typically a persons who leave due to retirement, illness etc. (and sometimes also non-competitive departures). Such good leavers often get to keep their instruments, although sometimes they will need to sell them for their full market value.
So, do not let the lingo mesmerize you – it’s just wordings. And, it’s important that you who are concerned feel that you grasp the meanings and consequences – so don’t be afraid to ask questions! Hopefully the above is to some help, and stay tuned – part II of this short tutorial will come in a week.
(…and for all of the Swedes out there – the English terms are typically used in the Swedish language as well.)
Stockholm, Jan 01 2023
Author: Katarina Strandberg
For one; ask what it (really) takes for you to ever get a return from the program you’re in. What are the targets/requirements, and what happens if you leave your job early? And for you offering the program – think about the attractiveness of the program and what behavior you want to drive. Do the terms (both overall and specific KPIs (jargon explained below)) really do the trick, or is there a risk that they drive the wrong behaviors and/or miss important areas? One common mistake is to only focus on easier metrics such as short-term financial results, and not properly look at long-term issues – sustainability is an area that is often left behind (LÄNK). Nonetheless, doing it right is – in my opinion – a fantastic and sustainable way of creating a co-creative and supportive environment within a company. If you share you get more.
So here is a short list of words commonly used in relation to incentive programs. Hopefully it gives you some insight into the structures and key issues that need to be addressed in relation to the programs (and some comfort as regards what is being discussed)
LTIP– Long Term Incentive Program. LTIP:s are programs where the award (often shares or options) is given to e.g. an employee over a longer period – typically 3-5 years. The value is often tied to the development of the company in some form. This can be made simple – e.g. shares in the company that vest over time, and automatically follow the company’s overall value development. But companies can also apply a more complex structure, where a number of KPIs will be tracked and weighed together to determine the size of the award at the end of a, or several, measurement period(s).
STIP– Short-Term Incentive Program. Same as LTIP but kept short - often a one-year period, and typically cash-settled.
KPI– Key Performance Indicator. Specific metrics that can be either qualitive; for example positive peer-to-peer reviews or quantitative; for example positive share price development.
Option. There are many kinds of options, but the core meaning of an option is a right to either buy (call option) or sell (put option) a particular security at predetermined price and terms at a future date.
Warrant. A right to subscribe for a share directly from the company. In many respects the same as a call option, but creates a new share when exercised.
Vesting. To earn shares/options over time. Typically, vesting means that you will only get to keep your shares/options if you “earn them” by remaining employed by the company during a “vesting period”. Vesting is often linear (if the vesting period is 4 years and you stay for 1, you get to keep 25% of the shares/options), but there are many creative alternatives.
Bad leaver. This is the scary one. Many programs state that if you leave the company (and become a “leaver”) on unfriendly terms, you risk losing all of your awards – sometimes even if they have vested. What makes you/the employee be seen as a bad-leaver will be defined by the one setting the program, but a common denominator is where you quit your employment and join a competitor.
Good leaver. When you leave without being a bad leaver. Typically a persons who leave due to retirement, illness etc. (and sometimes also non-competitive departures). Such good leavers often get to keep their instruments, although sometimes they will need to sell them for their full market value.
So, do not let the lingo mesmerize you – it’s just wordings. And, it’s important that you who are concerned feel that you grasp the meanings and consequences – so don’t be afraid to ask questions! Hopefully the above is to some help, and stay tuned – part II of this short tutorial will come in a week.
(…and for all of the Swedes out there – the English terms are typically used in the Swedish language as well.)
Stockholm, Jan 01 2023
Author: Katarina Strandberg