Why a Long-Term Incentive Plan Matters

The full title of this article should really read, "Why a Long-Term Incentive Plan Matters...MORE than Other Types of Incentive Plans." However, I didn't want you worn out before even starting the article--so forgive the abbreviated headline.

I recognize that's quite a claim, but hear me out. My premise is based, in part, on what recent HBR authors Paul Adler, Charles Hecksher and Laurence Prusak have discovered about institutions that have sustained records of both efficiency and innovation. Among other things, these organizations excel at achieving the following three things:

  • A Shared Purpose. An effective shared purpose, the authors indicate, "articulates how a group will position itself in relation to competitors and partners--and what key contributions to customers and society will define its success."
  • An Ethic of Contribution. Collaboratives communities generate accelerated results. Such organizations instill a bias towards contribution which in turn "accords the highest value to people who look beyond their specific roles and advance the common purpose," according to Adler, Hecksher and Prusak.
  • Interdependent Processes. In their article, the HBR authors quote a project manager from Computer Science Corporation as follow: "People support what they create...As a project manager, you're too far away from the technical work to define the [processes] yourself...It's only by involving your key people that you can be confident you have good [procedures] that have credibility in the eyes of their peers."

At this point you may be saying to yourself, "This is all very interesting, but what does it have to do with long-term incentive plans..and why they matter more than any other rewards plan within our business?" In a word, everything.

For a business to grow, it depends upon the collaborative efforts of a workforce that shares in the purposes and ends to which the company is working. By nature, organizations are made up of interdependent teams and individuals whose motivation for building cooperative processes depends upon buying into a shared ethic of contribution. In an ideal environment, employees recognize the value that grows out of a sense of partnership with those to whom they are "tethered" in the work that fulfills the shared purpose. When this can be harnessed and perpetuated, there is a magnified fulfillment experienced by everyone collectively and individually.

The role, then, of the Long-Term Incentive Plan is to define the financial nature and benefit of engaging in the three elements outlined above. Said another way, if all I experience from a pay program is a salary and annual bonus, there is no financial mechanism fostering in me the role of a shared purpose, the ethic of contribution and the interdependent processes that must be sustained for growth to emerge and then be sustained. While it isn't the only piece of the equation that allows these things to take root, if a long-term component isn't there, it is difficult for people to trust that a true partnership has been entered into with those who control the financial future of the business.

This is one of the primary reasons we tell our clients that they must make it a priority to introduce the long-term component in their rewards gameplan. When coupled with the short-term incentive, it balances the focus of participants between generating results right now with building and protecting long-term value .

For more information on the role long-term incentives can play in your company, check out our webinar entitled: How to Build Long-Term Value for Key Producers.

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