LONG TERM INCENTIVES: HOW TO DESIGN EFFECTIVE, UNDERSTANDABLE AND MOTIVATING LTI PLANS FOR MANAGEMENT

The systems of Long Term Incentive (LTI) are born with a clear objective: to orient managerial behaviour in the medium to long term, strengthening the alignment between individual performance, company results and sustainable value creation.

In the regulatory and governance framework of reference, the Directive (EU) 2017/828 (SHRD II) to Corporate Governance Code of Borsa Italianaup to the Remuneration Policies pursuant to Article 123-ter TUF and ESMA and EBA principles, LTIs represent a central tool for balancing strategy, risk and remuneration.

On paper, the design is rigorous, in practice, however, many LTI plans struggle to produce the expected effect: motivation, engagement and real strategic orientation of management.

The reason is often a design blind spot: the distance between the regulatory framework and the lived experience of those receiving the incentive.

LTI and managerial perception: the real blind spot of incentive systems

From the organisation's point of view, an LTI is a governance mechanism; for the manager, it is a promise of future value: deferred, conditional, complex. And this is where the first fracture arises.

An LTI plan can be perfectly compliance-oriented and at the same time:

• difficult to understand,
• perceived as ungovernable,
• experienced as distant from their real role.

And it is in this experiential dimension that many LTI plans lose their effectiveness. Indeed, observed from the managers' side, some LTIs surprisingly resemble complex films: great ambitions, articulated plots, distant and not always motivating endings. Let us look at some examples together.

When LTI loses its meaning: the risk of the ungovernable long run (Apocalypse Now)

In this type of LTI, the 'horror' does not come immediately. It occurs when the manager realises that the incentive, initially perceived as his own, has been fragmented along a time horizon that he no longer feels under control. Time expands, metrics become increasingly systemic and the link between decision and outcome weakens. The problem is not the long period itself, but the perceived loss of incidence.

This happens when:

• time splitting is not accompanied by a clear reinterpretation of the managerial role;

• Multi-year KPIs are experienced as an expression of the system, rather than an outcome of managerial action;

• the identity of the manager remains anchored in operations, while the plan rewards a non-explicit vision.

An LTI only works if it clarifies what it means 'being a manager' in that organisation: not just do, but direct; not just execute, but influence. Without this clarity, the long run ceases to be strategy and becomes destiny. And destiny, by definition, not motivating.

LTI complexity: when understanding the plan becomes a performance (Inception)

Many LTI plans are born with the best of intentions: to increase accuracy and fairness. The result, however, is often ahyper-engineered architecture, composed of:

• thresholds
• gate
• multipliers
• correctives
• cumulative conditions

Each level promises control. Overall, however, it generates distance: the manager no longer knows where to impact, which levers to move, which decisions really have an impact. Often the meaning of the plan only emerges ex post, after the fact. When understanding the incentive requires more interpretative effort than managerial effort, the plan has already lost its effectiveness.

Simplifying, in this context, does not mean trivialising. It means:

• reduce unnecessary conditional logic
• explain the why of the objectives, not just the rules
• speak the language of the role, of day-to-day decisions and real trade-offs

A good LTI does not simply reward what is written in the business plan. It rewards management's ability to make it concrete and real.

LTI and the VUCA context: the contradiction between adaptability and rigidity (Back to the Future)

Here we are talking about a volatile, uncertain, complex and ambiguous world. Management is asked to be resilient, adaptable and quick in making decisions under conditions of uncertainty. Then comes the LTI plan: long-term objectives defined ex ante, rigid and difficult to change. The contradiction is not only operational, but ontological: the manager has to adapt to a changing world, but is evaluated on targets set in another era. The problem does not lie in the standard itself, but in the absence of resilience mechanisms designed from the outset.

The most advanced best practices work on three levers:

1. Ex ante review mechanismsalready planned and approved (mergers, restructuring, market shocks);
2. Adaptive KPIsbased on benchmarks, reference bands or external parameters;
3. Clear narrative of managerial experiencewhich makes explicit what is governable today and what in time.

The tension between rigidity and adaptation is not eliminated. One learns to govern it with balance and elegance.

Individual incentives for collective challenges: the issue of perceived fairness (Mission: Impossible)

The more strategic an LTI is, the more success depends on the collaboration of an interdependent management team. Yet, many plans continue to be managed according to a predominantly individual logic, creating predictable but problematic results: the manager may lose the award despite a good performance, collective responsibility is not recognised and, as a result, frustration grows.

The problem does not lie in the difficulty of the objectives, but rather in the discrepancy between the collective logic necessary for strategic success and the individual management of the prize. 

A truly effective LTI recognises this collaborative nature of the challenge and acts on several fronts: it introduces shared reward logic, makes the interdependencies between people transparent and measures collaboration through objective criteria.

In this way, the manager perceives fairness, trust and a real sense of control. What might at first seem like a Mission: Impossible becomes a complex, but achievable and motivating challenge, capable of aligning individual performance and collective results.

How to design an LTI that really works: five guiding principles for HR and Reward Manager

A good LTI plan is, after all, also a good storyA story in which the manager clearly understands his role, recognises the levers at his disposal and perceives the concrete link between his decisions and the company's results. What is needed is not a spectacular ending, but a coherent one that makes clear the sense of the path taken.

To really work, an LTI must be based on five key principles:

1. Clarity on the managerial role you want to encourage;
2. KPIs that can really be influencedlinking the manager's actions to results;
3. Simple architecture in experienceavoiding unnecessary complexities and barriers to interpretation;
4. Ex ante designed adaptabilityto manage change scenarios or unforeseen contexts;
5. A path that makes the value of the incentive perceptible throughoutand not only in the final balance.

An LTI really works when the manager does not have to wait until the credits roll to see if he has performed wellwhen each stage of the plan communicates meaning, drive and motivation, turning complex objectives into a clear and governable path.