Talent, Trust, and Tenure: The Role of LTIPs in Family Businesses
The workforce behind a family business is often diverse, encompassing family members, long-term employees, former corporate executives, and even close friends. With such a variety of employee relationships, professional backgrounds, and career aspirations, managing compensation can be particularly complex.
While working in a family business offers benefits beyond salary—like company culture, community impact, and flexibility—compensation remains key to attracting and retaining top talent. One way for privately held family businesses to stay competitive is by offering long-term incentive plans (LTIPs). These plans align company objectives with the interests of key executives by incentivizing performance over a 3-5 year period, with the goal of retaining top talent and strengthening leadership stability.
Types of LTIPs
The two most common types of LTIPs offered to family business executives are Deferred Cash and Phantom Equity.
Deferred Cash: Unlike an end-of-year bonus, this structure is tied to achieving a combination of financial, strategic, and business unit performance metrics over a longer time horizon. These performance metrics should be challenging (but attainable) to achieve over a multi-year period, encouraging employees to focus on sustained company growth. This structure commonly features a deferred vesting schedule and payout timeline to retain employees after the initial award period ends.
For example, if the award period runs from January 1, 2020, to December 31, 2024, the vesting schedule would likely extend to 2028 or 2029, encouraging the executive to remain with the company. On January 1, 2025, the executive would automatically qualify for a new LTIP, continuing the cycle.
Phantom Equity / Equity Appreciation Rights (EARs): Similar to owning shares in a public company or participating in an ESOP, phantom equity and EARs incentivize performance by aligning rewards with the company’s equity growth or a proxy for equity value, such as an adjusted EBITDA multiple. Like deferred cash, this structure also has a deferred vesting schedule and payout timeline to retain employees.
Real Equity: Family business owners are often highly reluctant to provide real equity to non-family members, as doing so can dilute ownership and potentially compromise family control. While this hesitation is understandable, senior executives may still expect public company-style compensation. To bridge this gap, family businesses can use alternative strategies such as enhanced LTIP payouts, performance bonuses, or profit-sharing models that mimic equity rewards without diluting ownership. This approach allows family businesses to remain competitive while safeguarding family ownership and control.
The Case for LTIPs in Family Businesses
Innate to its structure, privately held family businesses have the flexibility to prioritize long-term performance and multi-year growth strategies over short-term targets. That said, while 97% of public companies offer a form of LTIP to key executives, privately held family businesses trail by half. So what are other drivers that family businesses should consider for implementing an LTIP? Consider succession planning.
Succession planning is an ongoing challenge for family businesses. In fact, only 30% of family businesses have a documented, ready-to-communicate succession plan. Many families become so consumed with daily operations or skeptical about the urgency of planning that they delay these important conversations. As a result, unexpected departures or crises often leave families scrambling to fill key leadership roles, resulting in rushed decisions at critical moments.
When constructed thoughtfully, an LTIP can strengthen leadership succession planning in several ways:
Attracts High-Performing Employees: LTIPs broaden the hiring pool to include ambitious mid-level managers with strong potential. By bringing in talent at this level, organizations can strategically develop and mentor them, equipping them with the skills, experience, and leadership mindset needed to advance into senior and executive positions over time. This proactive approach strengthens the leadership pipeline and ensures long-term organizational growth and stability.
Retains Key Talent & Ensures Leadership Stability: By demonstrating a commitment to recognizing and valuing senior executives, LTIPs foster loyalty and engagement. This reduces turnover, minimizing costly disruptions. Investing in leadership stability also mitigates the high costs associated with external executive replacements, which can reach up to 200% of an annual salary when factoring in recruitment, onboarding, and lost productivity.
Reward Mentoring: When using a deferred cash structure, organizations can integrate mentorship-driven metrics into LTIPs and annual performance-based compensation. By tying financial incentives to mentorship, companies reinforce a culture of knowledge transfer, leadership development, and internal growth—ultimately strengthening the next generation of leaders. While mentorship should be a core value on its own, embedding it into compensation structures reinforces its importance.
A well-structured LTIP can minimize succession risk in family businesses by strengthening leadership development and continuity. It attracts high-performing mid-level managers, ensuring a pipeline of future leaders, while retaining senior executives to reduce turnover and costly external hires. By tying incentives to mentorship, it fosters knowledge transfer and leadership growth for future generations of leaders. Together, these elements create a strategic framework that secures long-term leadership succession, preserves institutional knowledge, and aligns executive incentives with the company’s future success.
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