Most compensation strategies are built to attract talent. Long-term incentive plans (LTIP) are built to keep it. Salary gets someone in the door. A well-designed LTIP gives them a reason to still be there in three years, still performing, still invested in what the company becomes. This article explains what long-term incentive plans are, which types work for different company stages, and what companies need to know.
TL;DR
- Long-term incentive plans reward employees with deferred pay tied to multi-year goals. They align talent interests with business outcomes in a way that annual bonuses can not.
- Four main types:
- Equity-based plans
- Cash-based plans
- Phantom equity
- Profit-sharing.
- In Vietnam, LTIPs are taxable under the PIT law and must be structured carefully to avoid classification as regular salary.
What is a Long-term incentive plan (LTIP)?
“A long-term incentive plan is a compensation structure that defers a portion of employee reward over a multi-year period, typically three to five years, contingent on the individual remaining with the company or achieving defined performance outcomes.”
The core logic is straightforward: when employees have a meaningful financial stake in what happens to the organization over the next three years, they behave differently than employees who are only thinking about their next annual review.
LTIPs create alignment between individual motivation and organizational direction in a way that short-term bonuses structurally can not. According to the Pearl Meyer Compensation Study (2024), 97% of public companies and 68% of private companies now grant long-term incentives to senior executives. Critically, the trend is expanding: more than half of public companies now offer some form of LTIP below the VP level.
LTIP vs short-term incentive plans: key differences
Short-term incentive plans, typically annual bonuses or quarterly commissions, reward what has already been achieved. Long-term incentive plans reward commitment to what is still being built.
| Factor | Short-Term Incentive (STI) | Long-Term Incentive (LTI) |
|---|---|---|
| Time horizon | Up to 1 year | 3 to 5 years |
| Trigger | Annual or quarterly results | Sustained performance or tenure |
| Form | Cash | Equity, cash, phantom stock, profit share |
| Primary purpose | Reward current output | Retain and align key talent |
| Mobility risk | Low – Easy to leave after payout | High – Unvested awards create retention anchor |
| Vietnam admin complexity | Low | Medium to high, depending on type |
Who should receive long-term incentive plans?
Not every employee should be in an LTIP. The plan is most effective when it is concentrated on roles where retention has a disproportionate impact on business outcomes: people who hold critical client relationships, own technical architecture decisions, lead country operations, or are in the leadership pipeline.
The guiding question is not ‘who deserves it?’ but “whose departure would materially set back the business?” Applying that filter consistently produces a more defensible and motivationally effective LTIP structure than broad-based eligibility.
Typical eligibility tiers:
- C-suite and country-level leadership: full LTIP with equity or cash component
- Senior managers and department heads: partial LTIP, often cash-based or performance share
- High-potential employees in succession pipeline: smaller grants used primarily as retention signals
- Broad-based programs: profit-sharing or co-investment plans where equity is not feasible
For international companies hiring in Vietnam without a local entity, the ability to offer any form of LTIP depends on having a compliant employment structure in place. An Employer of Record (EOR) provides the legal employment foundation that makes these compensation arrangements possible and defensible under Vietnamese labor law.
Types of long-term incentive plans
The right type of LTIP depends on the company’s legal structure, maturity stage, whether it is publicly listed, and the employment framework in the markets where it operates. Each type has a different cost profile, tax treatment, and administrative complexity.
There are five main types of long-term incentive plans: Stock options, Equity-Based Incentive Plans (Restricted Stock Unit (RSU), Performance Shares), Cash-Based LTIP, Phantom Equity / Shadow Stock, and Profit-sharing plans. Each is suited to a different company stage, ownership structure, and workforce context.
| Type | Definition | Best suited for | Advantages | Limitations / Considerations |
|---|---|---|---|---|
| Stock Options | A stock option gives employees the right to purchase company shares at a fixed price (strike price) after a vesting period | – Pre-IPO technology and startup companies – Roles with direct impact on company valuation – Organizations accepting equity dilution for retention | – High upside if share price increases – Strong alignment with company growth | – Can become worthless if share price does not exceed strike price – Requires employees to fund exercise – Tax implications vary (e.g., PIT at exercise in Vietnam) |
| Equity-Based Incentive Plans (Restricted Stock Unit (RSU), Performance Shares) | Plans that grant shares directly (RSUs) or based on performance conditions (performance shares), without requiring purchase | – Publicly listed companies – Organizations with clear performance measurement systems | – RSUs have guaranteed value at vesting (if share price > 0) – Performance shares link reward to company outcomes – Align employee and shareholder interests | – Complex to implement in early stage or Vietnam entities – Liquidity challenges in private companies – Administrative complexity |
| Cash-Based LTIP | A deferred cash incentive paid over time, tied to tenure, performance, or both | – Companies without publicly traded equity – Markets with complex share administration (e.g., Vietnam) – Organizations prioritizing simplicity | – No equity or cap table management required – Easy to process through payroll – Simple for employees to understand – Fully compliant when structured properly | – No direct ownership upside – May be less attractive for top-tier executive talent compared to equity |
| Phantom Equity / Shadow Stock | Provides employees with the economic value of shares without granting actual ownership, typically paid in cash based on valuation growth | – Private companies – Firms wanting equity-like incentives without dilution | – No dilution or share issuance required – Strong alignment with company value growth -Retention-focused | – Still requires valuation methodology – Can be complex to explain – Cash payout obligation for the company |
| Profit-Sharing Plans | Distributes a portion of company profits to employees, usually annually or over a performance cycle | – Broad employee base – Organizations focused on engagement rather than retention of key roles | – Encourages shared ownership mindset – Simple and transparent structure | – Less effective for retaining senior talent – Not directly tied to individual performance – Payout variability based on company results |
For companies evaluating which LTIP structure fits their Vietnam team, the decision often comes down to entity status. A detailed overview of recruiting C-level executives in Vietnam provides relevant context on the expectations senior local talent brings to compensation conversations.
How vesting schedules work in incentive plans
The vesting schedule is what gives an LTIP its retention power. It determines when, and under what conditions, an employee can actually access the reward they have been promised.
Cliff vesting vs graded vesting
According to JPMorgan, with cliff vesting, no portion of the award is earned until a specific date. An employee granted a 3-year cliff vest receives nothing if they leave in month 35, and the full award if they leave in month 37. This creates a powerful retention anchor but can feel punishing and drive departures just before the cliff.
Graded vesting releases a portion of the award at regular intervals, typically annually. The employee earns 25% in year one, 25% in year two, and so on. This is more perceived as fair and reduces the risk of cliff-driven attrition, but provides a slightly weaker retention hold at any single point.
| Vesting Type | Structure | Retention Effect | Risk |
|---|---|---|---|
| Cliff | 100% at end of period | Very strong at the cliff date | Attrition spike just before cliff |
| Graded (annual) | Equal % released each year | Consistent, lower at any single point | Easier to leave mid-program |
| Graded (milestone) | % released on goal achievement | Tied to performance, not just time | Perceived as unfair if goals shift |
| Hybrid | Cliff + performance layer | Strongest retention anchor | Most complex to administer |
Performance-based vs time-based vesting
Time-based vesting rewards tenure. Performance-based vesting rewards outcomes. In practice, most effective LTIPs use a combination: time is the baseline condition (the employee must still be present), and performance determines the size of the award that vests.
A common structure is to set a target award, then apply a performance multiplier of 0 to 2x depending on whether the company or individual meets, misses, or exceeds defined KPIs. This keeps the retention function of time-based vesting while adding the motivational value of performance linkage.
How to set a vesting schedule that retains without handcuffing
A vesting schedule that is too aggressive discourages candidates from joining. One that is too loose provides no meaningful retention hold. The right calibration depends on role criticality, the competitive landscape for that talent, and the typical career horizon of candidates in the target market.
Design principles:
- 3-year schedules are the market standard in most B2B tech and professional services contexts
- Include a minimum one-year cliff before any portion vests, to exclude very short-tenure attrition
- Review the schedule every 2 years as your workforce profile and competitive market evolve
A pre-hire scorecard aligned to the role and LTIP eligibility criteria helps ensure the right candidates are offered participation from the outset. This reduces the risk of awarding grants to individuals who were unlikely to stay.
How to design a long-term incentive plan (6 steps)
A well-designed LTIP is specific enough to drive behavior, simple enough for participants to understand, and compliant enough to survive an audit. Building it systematically reduces the risk of design errors that only surface at payout time.
Step 1. Define the business objectives the LTIP should drive
Start with the strategic outcome, not the compensation mechanic. What does the business need to be true in three years that requires retaining specific people today? Framing the LTIP as a solution to a defined retention or performance problem produces a more effective plan than framing it as a benefit to be distributed.
Common LTIP objectives:
- Retain country leadership through a high-growth phase
- Align Vietnam engineering team with product success metrics during pre-IPO preparation
- Reduce attrition in critical technical roles where 6-month replacement cycles are operationally damaging
Step 2. Choose the right incentive type for your company stage
The most common mistake is choosing equity because it sounds more prestigious, when cash is actually more practical and motivating for the specific team and market. Run through four questions before deciding.
Decision questions:
- Does the company have publicly traded or liquid equity? If no, cash or phantom equity is usually more effective
- What is the typical financial literacy of the participant pool? Complex equity instruments require sustained communication investment
- What is the tax outcome for participants in Vietnam? PIT treatment differs significantly by instrument type
Step 3. Set performance metrics and payout conditions
Performance metrics should be specific, measurable, within the participant’s sphere of influence, and connected to the business outcomes the plan was designed to drive. The two most common failure modes are metrics that are too distant from individual behavior (company-wide EBITDA for a country ops lead) and metrics that are too narrow and gameable.
Step 4. Define eligibility and grant levels by role
Grant levels should be expressed as a percentage of fixed salary at target, differentiated by role tier. This keeps the plan internally consistent and makes future grant decisions easier as the organization scales.
| Role Tier | Typical LTIP Grant (% of Annual Salary) | Vesting Period | Primary Type |
| C-suite / Country Head | 50-100% | 3-4 years | Equity or cash with performance conditions |
| Senior Manager / Director | 25-50% | 3 years | Cash-based or phantom equity |
| High-Potential / HIPO | 10-25% | 2-3 years | Cash-based with retention vesting |
| Broad-based (optional) | 5-10% | 1-2 years | Profit share or co-investment |
Step 5. Document the plan and get board or leadership approval
Every LTIP participant should receive a written award letter that specifies the grant amount, vesting schedule, performance conditions, forfeiture rules, and what happens to unvested awards on termination, resignation, or company acquisition.
In Vietnam, any written compensation commitment in an employment agreement or subsidiary document becomes a legally enforceable obligation under the Labor Code 2019. Informal or verbal LTIP arrangements have no legal standing and create risk in disputes.
Step 6. Communicate the plan clearly to participants
An LTIP only motivates if the participant understands it. A plan that exists in a PDF that nobody reads has no retention value. The communication investment should match the financial investment.
Effective communication includes:
- A plain-language summary of how the award is calculated and when it vests
- An annual statement showing current value (especially for cash plans) and time to next vesting event
- Manager training so line managers can explain the plan and answer questions consistently
For complex plans involving multiple currency or legal jurisdictions, working with a partner that handles talent mapping and compensation benchmarking ensures the plan design reflects market reality before it is communicated to participants.
Long-term incentive plan examples
Long-term incentive plan examples vary considerably by company stage and ownership structure. The three scenarios below illustrate how the same design principles apply differently depending on whether the company has liquid equity.
LTIP for a pre-IPO technology company
Pre-IPO companies face a unique challenge: equity may have strong theoretical value but limited liquidity, making it less attractive to experienced hires who have seen stock options become worthless. A well-structured phantom equity plan helps solve this by tying payouts to clear valuation milestones or liquidity events, while keeping the cap table clean.
A typical structure includes phantom stock units equivalent to 0.1-0.5% of the company’s notional value for senior hires, with vesting triggered at key events such as Series B, Series C, or IPO, often followed by a one-year lock-up. Payouts are then settled in cash based on the company’s valuation at the trigger date.
Cash LTIP for a Vietnam operations team
For companies without local equity to offer, a deferred cash plan with performance conditions is both simpler and more immediately motivating than equity instruments that require financial literacy and liquidity assumptions.
Example: 3-year cash LTIP for Vietnam operations leadership
| Year | Vesting Condition | Payout (% of Target Award) |
|---|---|---|
| Year 1 | Tenure only (must be employed at vesting date) | 30% |
| Year 2 | Tenure + revenue target at 85%+ achievement | 30% |
| Year 3 | Tenure + revenue target + team retention rate above 80% | 40% |
Restricted Stock Unit plan for a multinational company with local entity
For multinationals with a registered Vietnamese entity and listed stock, Restricted Stock Units represent the cleanest LTIP structure. They have guaranteed value at vesting (unlike options) and align the local team with the global company’s performance directly.
The administrative complexity is higher: share registry management, PIT withholding on vesting income, and employment contract documentation all require local legal and payroll expertise. However, for companies with the infrastructure in place, RSUs provide the strongest motivational and retention profile of any LTIP type.
For companies at the growth stage considering when and how to hire for leadership roles in Vietnam, hiring in Vietnam provides a practical framework for the end-to-end process, including compensation benchmarking for senior roles.
Short-Term vs Long-Term incentive plans: how to balance both
When HR teams compare short-term incentive (STI) vs long-term incentive (LTI) plans, the instinct is often to ask which is better. The more useful question is which does what, and for whom. The two types serve structurally different purposes and should be funded and measured separately.
What short-term incentive plans cover and where they fall short
Annual bonuses and quarterly commissions are effective at driving near-term output: hitting a sales number, completing a project, delivering a product cycle. Their limitation is structural. Once paid, they have zero future retention value. An employee who has received their bonus has no financial reason to stay that they did not have before it landed.
STIs also tend to encourage behavior optimized for the measurement window. Quarterly metrics produce quarterly thinking. If the business needs people thinking in years, not quarters, the incentive design should reflect that.
How to combine STI and LTI into a total rewards framework
The most effective total rewards frameworks define a target cash compensation (fixed + STI at 100% performance), and then layer an LTIP on top as a deferred wealth accumulation opportunity that grows with the company.
| Role | Fixed Salary | STI Target (% of salary) | LTIP Target (% of salary) | Total Target Comp |
|---|---|---|---|---|
| Country Head | $60,000 | 25% = $15,000 | 50% = $30,000 | $105,000 |
| Senior Manager | $36,000 | 15% = $5,400 | 30% = $10,800 | $52,200 |
| Manager / HIPO | $24,000 | 10% = $2,400 | 15% = $3,600 | $30,000 |
Common mistakes when mixing short and long-term incentives
Avoid common pitfalls when designing LTIPs. Do not use long-term incentives to offset below-market base salary, as deferred pay cannot fix immediate competitiveness issues. Keep STI and LTI budgets separate, and avoid duplicating performance metrics across both since each should reflect different time horizons and outcomes.
It is also critical to clearly communicate total target compensation, as candidates evaluate offers holistically. An LTIP that cannot be easily understood or valued will not strengthen your offer. More broadly, LTIP design should align with succession planning and long-term workforce planning, especially in developing leadership pipelines and retaining key talent.
Running incentive plans in Vietnam: what global companies should know
The compliance questions around LTIPs should be answered before the plan is communicated to participants, not after.
Tax treatment of LTIPs under the Vietnam PiT law
Vietnam’s Personal Income Tax treats deferred compensation as employment income in the tax year it is received, not when it was granted. And this means PIT is applied at the progressive rates of 5 to 35 percent on the full value of any LTIP tranche at the point of vesting or payment.
Under Circular 111/2013/TT-BTC, all forms of employee remuneration from employers, including deferred cash awards and the market value of shares received at vesting, constitute taxable employment income subject to progressive PIT rates in the year of receipt. (Vietnam Ministry of Finance, Circular 111/2013/TT-BTC)
Cash vs equity plans: which is simpler to administer in Vietnam?
The cash-based incentive plan vs equity plan question comes up in almost every Vietnam LTIP conversation. The answer depends less on preference and more on what the company can actually administer compliantly.
Cash-based LTIPs are unambiguously simpler to administer in Vietnam. The payment runs through the existing payroll system. PIT withholding follows the same process as regular salary. No share registry, no valuation certificates, no foreign exchange considerations.
Equity plans require significantly more infrastructure: a local legal opinion on instrument classification, share administration procedures compliant with Vietnamese securities law, and in some cases approval from the State Securities Commission.
How EOR arrangements support compliant LTIP administration
When a company employs staff in Vietnam through an Employer of Record, the EOR is the legal employer and is responsible for payroll, PIT withholding, and labor law compliance. This creates a clean structure for administering cash LTIPs: the EOR processes the payment, withholds PIT, and ensures the payment is documented correctly in the employment record.
What the EOR cannot do is design the LTIP plan itself or make decisions about who receives what. Those remain the client company’s responsibility. The EOR’s role is to ensure that once the plan is designed and approved, the payments are processed accurately and compliantly.
For a complete view of how payroll and compensation administration works within a Vietnam EOR structure, payroll service in Vietnam guide covers the end-to-end process including LTIP payment handling, PIT compliance, and documentation requirements.
How Sunbytes helps global companies build and retain teams in Vietnam
Sunbytes supports international companies in designing compliant employment structures, managing payroll, and retaining key talent across Vietnam. From setting up an Employer of Record arrangement to administering complex compensation packages, we remove the operational burden so your team can focus on performance.
With 15+ years of experience and 300+ client projects across 20+ countries, we understand what it takes to build a loyal, high-performing workforce in Vietnam, and to keep it.
Why Sunbytes?
Sunbytes is a Dutch technology and workforce company headquartered in Utrecht, Netherlands, with a delivery hub in Ho Chi Minh City, Vietnam. Visit Sunbytes to learn more about how we work.
Our capabilities are built on three core service pillars:
- Digital Transformation Solutions – Supporting end-to-end product development and tech team scaling. Our technology expertise means we understand what motivates senior technical talent, and how compensation design interacts with team structure and performance.
- CyberSecurity Solutions – Embedding security and compliance discipline across client operations. As LTIPs involve sensitive compensation data and multi-year documentation, a security-first approach to HR data management is not optional.
- Accelerate Workforce Solutions – Helping international companies hire, retain, and pay compliant teams in Vietnam through Employer of Record, payroll services, staffing, and Contractor of Record. This pillar is the operational foundation that makes long-term incentive plans possible for companies without a local entity.
FAQs
A bonus plan pays out for results achieved in a defined short period, usually one year or less, and has no ongoing retention effect once paid. An LTIP defers reward over muLTIPle years and creates a financial anchor that gives employees a specific reason to stay. The LTIP is designed to retain; the bonus is designed to reward.
Yes. Private companies have several practical options: cash-based deferred compensation, phantom equity tied to a notional valuation, profit-sharing over a multi-year cycle, or co-investment plans. The absence of public equity removes one instrument type but does not remove the ability to offer meaningful long-term incentives.
Start with market benchmarking for the specific role and seniority level in your industry and geography. LTIP grant levels are typically expressed as a percentage of annual fixed salary. For Vietnam leadership roles, 25 to 50% of salary for senior managers and 50 to 100% for C-suite is broadly consistent with regional practice for multinational companies.
This depends entirely on the forfeiture rules documented in the award letter. Standard practice is that unvested awards are forfeited on voluntary resignation or termination for cause, and a defined portion may vest on a pro-rated basis in cases of redundancy or company-initiated termination. In Vietnam, these rules must be explicitly documented in writing and aligned with labor law termination provisions to be enforceable.
All LTIP payments, whether cash or equity, are treated as employment income and subject to progressive PIT rates in the tax year they are received. For cash plans, PIT is withheld by the employer at the time of payment through the standard payroll process. For equity plans, PIT is calculated on the fair market value of the shares at the vesting date. There is no preferential tax rate for long-term compensation in Vietnam.
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