By far the largest potential component of executive pay is the long term-incentive. The purpose of the long-term incentive is to reward executives for achievement of the company’s strategic objectives that will maximize shareholder value.
Typically these have been provided in the form of stock-based compensation, such as:
- stock options
- restricted stock
- performance-vested stock, options, or similar devices
The performance period for a long-term incentive typically runs between three and five years, with the executive not receiving any pay from the incentive until the end of the performance period. Long-term incentive goals vary by company but the most prevalent are focused on total return to shareholders, earnings per share and other return measures, such as return on assets. Like annual incentives, long-term incentives typically have a target and a stretch component to encourage executives to achieve superior performance.