Working with a client recently on their LTIP, I was reminded how perception of value differs greatly between individuals. I thought I would share this previous blog on the challenge of long-term incentives.

Imagine, for a moment, that a wizard is standing in front of you. In his hand, he holds two envelopes. He explains that you can choose only one of the envelopes. In one is £10,000, which you can have now, completely free, with no reservation. In the other envelope is £20,000, which you might get in three years’ time. Which would you choose?

If you are like the majority of people, you will have no hesitation in snatching the £10,000 from the wizard’s fingers, and trying to decide how much you can spend without your spouse finding out. So how much more would the £20,000 have to be, before you choose it over the £10,000 here and now? £25,000, £30,000, more?

And that is the conundrum of long-term incentive plans. They are very expensive. To really catch an executive’s attention, the amount in the second envelope needs to be substantial to be more attractive than cash here and now (or salary, as we usually call it). Executives discount by about 50% over a 3 year time period, so be very sure the business will make the money before allowing the Remuneration Committee to get carried away with long-term plans that executives don’t really value.

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