Long-Term Incentives, Short-Term Thinking: Fixing the LTIP Disconnect

When designed effectively, long-term incentive plans (LTIPs) align executive decision-making with sustainable business success. Usually delivered through equity awards, performance shares, stock options, or cash, they aim to encourage leaders to prioritise long-term value creation. Well-designed LTIPs improve retention, strengthen strategic alignment, and support company growth. However, organisations limit their effectiveness when they misunderstand both executive behaviour and the realities of long-term business strategy.

The Behavioural Disconnect

A challenge within LTIP design is incorporating how executives actually think and behave. Behavioural economics shows that people naturally discount future rewards, placing greater value on immediate compensation than uncertain rewards several years away. Research from Harvard Business Review (HBR) argues that executives frequently struggle to connect day-to-day decisions with LTIP outcomes because the rewards feel too distant and uncertain.

Risk aversion can also undermine LTIP effectiveness and must be considered. If executives perceive LTIP payouts as uncertain, they may prioritise safer short-term decisions that protect annual performance rather than pursuing long-term investment opportunities.

Over-complexity creates another behavioural challenge within LTIP design. Many schemes rely on too many key performance indicators (KPIs) and performance  measures, making it difficult for executives to clearly understand what is being rewarded. Important long-term indicators, such as innovation, leadership, and employee retention, can also be overlooked, reducing the overall impact of the LTIP.

Executives are generally more influenced by relative pay than absolute pay. Even generous LTIPs can lose motivational value if peer organisations appear to offer stronger or more immediate rewards. Given that LTIPs are designed to support long-term retention, maintaining competitive reward structures is essential to sustaining their effectiveness over time.

Together, these factors influence executive behaviour and explain why many LTIPs fail to drive long-term thinking.

The Structural Problem

Many LTIPs are also structurally not aligned with  real long-term value creation. Despite their name, most LTIPs operate on three-to-five-year cycles, with three years being most common. However, many strategic initiatives, including transformation, innovation, and cultural change, take significantly longer to deliver meaningful results. As discussed in Harvard Law School’s Forum on Corporate Governance, incentives must align with the actual timeframe of strategic value creation, potentially extending to seven or even ten years, but in a way that Executives do not adversely discount them as alluded to earlier.

In our experience, there is no single LTIP structure that works for every organisation. Effective plan design should reflect the organisation's ownership structure, strategic priorities, governance framework, and long-term objectives. For example, family-owned businesses may find that cash-based incentives better support ownership and succession planning, while equity-based arrangements may be more appropriate elsewhere. Applying a standardised approach without considering these factors can significantly reduce the effectiveness of an LTIP.

Operational rollout can also create structural challenges. LTIPs are far less effective when incentives are not consistently aligned across leadership teams and wider management structures. Without a clear company-wide approach, long-term priorities often fail to translate into broader organisational behaviour.

Fixing the LTIP disconnect

LTIPs can be highly effective when designed using key principles:

1. Start with purpose

First, define what the LTIP is trying to achieve: growth, innovation, transformation, retention, succession planning, or long-term shareholder value.

2. Simplify the LTIP and limit the number of Performance Measures

Too much complexity and too many metrics can weaken the LTIP. Prioritise a smaller number of meaningful KPIs, balancing financial and non-financial measures.

3. Choose the right structure

Not every organisation should use the same model. Equity awards, cash, performance shares, or hybrid approaches should reflect the company’s ownership structure, culture, and goals.

4. Align  the timeframe

If meaningful strategic change takes seven years, incentives should reflect that reality. Forcing LTIP outcomes into a standard three-year cycle undermines their success.

5. Build strong governance

Ensure that LTIP implementation is supported by sound governance structures and supporting administrative processes and procedures

6. Align the wider business

LTIPs should not operate in isolation. Long-term priorities must be reinforced consistently across leadership teams and wider organisational structures. As explored in our previous article, Strategy Behind the Strategy: Incentive Rewards and Business Outcomes, reward mechanisms are most effective when they are directly aligned with business and people objectives. LTIPs should therefore be designed as one component of a broader reward strategy that drives behaviours which support organisational priorities.

Many LTIPs currently fail because they do not engender a long-term mindset, are overly complex, and don’t drive the intended executive behaviour. When organisations simplify incentives, align them clearly with strategy, select meaningful KPIs, and design plans around realistic long-term goals, LTIPs have the potential to strengthen business strategy and support value creation over time.