Long-Term Incentives (LTI) for US Executives: A Guide for Foreign Employers

This article is for general information only and does not constitute legal, tax or financial advice. Pact & Partners is an executive search firm, not a law firm or an accounting practice. Long-term incentive plans, their tax treatment and the applicable employment rules depend on your structure, the state and each executive's situation: have any plan reviewed by qualified US counsel, tax advisors and compensation specialists before you implement it.

Your VP of Sales candidate has just asked about your long-term incentive package. You are a German industrial manufacturer with a solid US subsidiary. You have built a competitive base salary and a sound annual bonus. But when the candidate asks, "What's my LTI?", you have no answer.

You tell her you do not have a formal long-term incentive program yet.

She stops replying to your emails.

This happens more often than foreign employers like to admit, and it is costly. The best executives in the United States do not only want cash. They want a stake in the outcome: equity, or something that works like equity. They want to know that if the US operation grows, or if the parent company is sold or goes public, they will benefit materially.

You have just lost a candidate earning well over $200,000 because you had no answer to a compensation question you did not know mattered. It is one of the most common reasons an offer stalls when recruiting a VP of Sales for the US market.

Founded in France in 1987, Pact & Partners has been building American leadership teams for foreign companies since 2012. Experience has taught us this: the foreign-headquartered company that enters the US market strong in product but weak in compensation architecture, especially long-term incentives, pays for it later. It hires at higher cost, loses people to competitors who solved the problem, and eventually asks a recruiter or a compensation consultant, "What do we do?"

This guide is the answer we wish we could have sent those companies earlier. It focuses on the design of a long-term incentive plan when you cannot simply hand out US-traded shares: cash plans, performance units, phantom stock, deferred compensation, vesting, performance metrics and the Section 409A rules that govern them.

Long-Term Incentive Vehicles at a Glance

Indicative overview. The right vehicle depends on your ownership structure, your accounting and tax position, and the role.

What Long-Term Incentives Actually Are

A long-term incentive (LTI) is any compensation designed to reward an executive over more than one year, typically three to five years. In the United States it is most often equity or an equity-like instrument, but it can also be a multi-year cash plan.

In much of Europe and Asia, a senior manager may be satisfied with a base salary, an annual bonus tied to company performance and perhaps a pension plan. In the United States, particularly for senior roles, the LTI is the third pillar of compensation:

Base salary + annual bonus + LTI = total direct compensation

If the third pillar is missing, your offer is not competitive for most senior candidates. In large US public companies, long-term incentives typically make up more than half of a CEO's target pay, and a large share of other senior executives' pay. Private equity-backed companies grant equity to their leadership teams. Venture-backed companies are built around stock options. The expectation that a significant role comes with a long-term stake is built into the American executive market in a way it often is not elsewhere.

For a foreign employer, this creates an immediate problem. You may not have stock traded in the US. You may have no infrastructure to grant equity, no independent valuation of your US business, and shareholders (a family, a founder, a parent group) who do not want to dilute ownership. It is tempting to conclude that LTI is not worth the complexity.

It usually is worth it, and it is more achievable than it looks, because an effective LTI does not have to involve shares at all.

Why American Executives Expect LTI

Part of it is culture. American executives have watched equity create wealth: founders of successful start-ups, senior executives of large public companies, peers at venture-backed firms who talk about their LTI as "the real money." Annual pay covers the lifestyle; the long-term incentive is where wealth is built.

When you do not offer an LTI, a candidate may read one of three signals:

1. You do not understand US compensation norms.

2. You do not intend to reward long-term thinking.

3. You are not serious about scaling the US business.

Any of these signals will cost you candidates.

Tax is a smaller part of the story than many people think. Cash LTI, phantom stock and stock appreciation rights are taxed as ordinary income when paid, and RSUs are taxed as ordinary income on their value at vesting. Only certain equity (shares held after vesting or exercise, and incentive stock options that meet the holding rules) can turn later growth into a lower-taxed capital gain. The real appeal of LTI is upside, alignment and the sense of ownership.

For VP and C-level hires in most sectors, an LTI is expected, and it is increasingly common at director level in technology and life sciences. A foreign employer that offers none competes at a disadvantage against US companies that do.

The Main LTI Vehicles for Foreign Employers

Equity from the Parent: RSUs and Stock Options

Restricted stock units are the most common equity award in US companies. The executive receives "units" that become shares, or a cash amount equal to their value, as they vest. For example, a grant of 10,000 RSUs when the share is worth $10 represents a $100,000 award. On a four-year schedule with a one-year cliff, 2,500 units vest on the first anniversary of the grant, and the remaining 7,500 vest in equal installments through the fourth anniversary.

Stock options give the right to buy shares at a fixed price, normally the market value on the grant date, for up to 10 years. They are worth something only if the share price rises, which makes them attractive to high-growth companies and less so to mature groups.

For a foreign group whose shares are listed, granting parent-company RSUs or options to US executives is often the simplest route. It does, however, raise questions of US securities law, US payroll withholding on the value delivered, currency exposure and the recharge of the cost to the US subsidiary, which your advisors will need to address. If your parent company has no listed shares, the vehicles below are usually more practical.

Performance Share Units (PSUs)

Performance share units are RSUs whose final number depends on results measured over a performance period, usually three years. A typical design sets a threshold, a target and a maximum: below threshold, nothing vests; at target, 100% of the units vest; at maximum, a higher percentage (often 150% to 200%) vests.

Example: An executive receives 5,000 PSUs at target. If cumulative revenue over three years reaches the target, 5,000 shares vest. If it reaches the maximum, up to 10,000 vest. Below the threshold, none do.

PSUs are the dominant LTI vehicle in large US public companies. They are powerful because they combine retention and motivation, but they require clear, measurable targets and reliable reporting. The same logic can be applied without shares, through performance units settled in cash, which is the basis of a cash LTIP.

Phantom Stock and Stock Appreciation Rights

Instead of issuing real shares, you promise the executive a cash payment that tracks the value of the company, or of the US business. No shares change hands and no shareholder is diluted.

Phantom stock pays the full value of notional units. Stock appreciation rights (SARs) pay only the increase in value since the grant date.

Example: Your US subsidiary is valued at $40 million at the grant date, divided into 4,000,000 notional units worth $10 each. The executive receives 20,000 units. Four years later, the subsidiary is valued at $60 million, or $15 per unit. With phantom stock, the executive receives 20,000 x $15 = $300,000. With SARs, the executive receives only the appreciation: 20,000 x $5 = $100,000.

These plans are very flexible for foreign employers: they require no share issuance, they are settled in cash, and they feel like equity to the executive. The trade-offs are real, though:

• You need a credible valuation method, defined in the plan from day one (an independent appraisal, or a formula such as a multiple of EBITDA), or every payout becomes a negotiation.

• You need cash to pay the awards when they become due.

• The payment timing must comply with Section 409A, discussed below.

• Under both IFRS 2 and US GAAP (ASC 718), cash-settled awards are generally recorded as a liability and remeasured at each reporting date, which creates volatility in the accounts of the US subsidiary and of the group.

Cash LTIP: Long-Term Cash Plans

A cash long-term incentive plan (LTIP) pays a cash award at the end of a multi-year performance cycle, based on results over the whole cycle and on the executive still being employed.

Example: The executive has a target award of $150,000 per cycle. Each cycle lasts three years and is measured on cumulative US revenue and operating margin. Payout ranges from 0% below threshold to 100% at target and up to a capped maximum. A new cycle starts every year, so after the first three years the executive has a payout every year and always has two or three cycles in progress, which is what makes leaving expensive.

Cash LTIPs are underused by foreign employers, yet they are often the best fit for a privately held or family-owned group: they reward the performance of the US business, they never dilute shareholders, and they are easy to explain. Their weakness is the absence of a link to the value of the company, which some candidates from listed or venture-backed companies will notice. A cash LTIP based on performance units, whose value moves with a measure of company value, can close that gap.

Deferred Compensation Plans

A nonqualified deferred compensation (NQDC) plan lets the executive defer part of salary or bonus, and lets the company add its own credits, to be paid at a later date such as a fixed year, separation from service or a change in control. Employer credits can vest over several years, which gives the plan a retention effect.

These plans are common for senior executives because US tax-qualified retirement plans such as the 401(k) cap the contributions of high earners. Two points matter for a foreign employer. First, an NQDC plan is an unsecured promise: even when the company funds a "rabbi trust," the assets remain available to its creditors in an insolvency. Second, NQDC plans are squarely within Section 409A, so the timing of deferral elections and of payments must follow strict rules.

Choosing a Structure That Fits Your Ownership

The right structure depends less on fashion than on who owns the company and how it expects to create value.

Listed Parent Company

If your parent company is listed, in the United States or abroad, the most natural LTI is an award of parent-company RSUs and PSUs, often under an existing global plan. This is what US executives from public companies know best, and it is usually the strongest signal you can send.

The complications are practical rather than prohibitive. Offering shares to US employees generally requires registration with the SEC (typically on Form S-8 for a company that reports to the SEC) or an exemption, such as Rule 701 for companies that do not. The US employer must withhold US taxes on the value delivered, even when the shares are delivered by the parent. Awards denominated in euros, yen or pounds expose the executive to currency risk. And performance metrics set at group level may feel remote to an executive running the US business. Many groups solve this last point with a mix: PSUs on group metrics, plus a cash component tied to US results. A US CEO will usually expect to see both.

Privately Held or Family-Owned Parent

This is the most frequent situation among our clients, and the one where companies most often conclude, wrongly, that they cannot offer an LTI. Phantom stock or SARs on the value of the US subsidiary, or a cash LTIP on US results, give the executive a genuine long-term stake without opening the capital. The keys are a valuation method agreed in advance, a payout schedule the company can fund, and plan documents drafted with US counsel.

Private Equity-Backed Company

Private equity owners use LTI aggressively because they want management to grow the business toward an exit, often four to seven years after the investment. The LTI is usually real equity in the holding company, through a management incentive pool, with vesting that combines time and exit-based conditions (for example, a minimum return to the fund). Management can earn a significant multiple on its equity at exit, but often receives nothing of value until then.

Venture-Backed or Early-Stage Company

A foreign start-up or scale-up that raises venture capital will typically offer stock options. To avoid adverse tax consequences, the exercise price must be at least the fair market value of the shares on the grant date, which is why venture-backed companies obtain regular independent valuations (often called "409A valuations"). Grants are larger as a percentage of the company at the earliest stages and shrink as the company raises successive rounds. Candidates for technical roles, such as those we meet when recruiting a CTO for a US expansion, compare these grants closely against offers from US start-ups.

Designing Performance Metrics

A long-term incentive is only as good as its metrics. A few design rules avoid most disputes:

• Use two or three metrics, not seven. Revenue growth, operating margin or EBITDA, and cash generation cover most situations. Listed groups often add relative total shareholder return (TSR) against a peer group.

• Measure what the executive can influence. A US general manager can drive US revenue and margin; group earnings per share are largely outside their control. Mixing US and group metrics is a sound compromise.

• Set threshold, target and maximum. A payout curve that starts at a meaningful threshold and is capped at a maximum rewards real performance and keeps costs predictable.

• Define the rules before the cycle starts. How currency movements, acquisitions, divestitures and accounting changes are treated should be written into the plan, not negotiated after the fact.

• Plan for clawback. Companies listed on a US exchange, including foreign private issuers, must have a policy to recover incentive compensation paid on financial results that are later restated. Private companies are not required to, but many include a clawback for misconduct.

Your CFO should own the metric definitions and the calculation, and the first targets should be consistent with the objectives set for the executive's first 100 days and first year.

Vesting Schedules Explained

A vesting schedule is the timeline over which an LTI award becomes the executive's.

Four-Year Vesting with a One-Year Cliff

This is the norm in US technology and growth companies.

• Grant date: the executive receives 4,800 RSUs or options.

• First anniversary (the cliff): 1,200 vest (25% of the grant). Nothing vests before this date; if the executive leaves in month 11, the entire grant is forfeited.

• Years two to four: the remaining 3,600 vest in equal installments, monthly, quarterly or annually, until the fourth anniversary.

The cliff exists to ensure the executive is committed before anything vests. The four-year horizon is partly convention, but it reflects the time needed to prove material value. With a new grant every year, the overlapping schedules mean the executive always has unvested awards, which is a strong retention tool.

Three-Year Ratable Vesting

Common in large public companies for RSUs:

• First anniversary: one third vests.

• Second anniversary: one third vests.

• Third anniversary: the final third vests.

The executive still waits a year for the first tranche, but keeps each tranche once vested. It is shorter and gentler than the four-year model while preserving a retention effect.

Monthly Vesting

"You vest 1/48th of your grant each month" spreads vesting evenly over four years. An executive who leaves after three months keeps three months' worth. Monthly vesting with no cliff is less common for senior roles, where the cliff is a useful retention tool, but it is often used after the cliff.

Performance and Cliff Vesting

PSUs and cash LTIPs usually vest in one block at the end of a three-year performance period, in an amount that depends on results. This is the most demanding schedule for the executive and the most aligned with the business, provided the metrics are clear and the reporting is transparent.

Leaving the Company and Change in Control

The plan must say what happens to unvested awards in each scenario, and candidates will read these clauses closely:

• Resignation or termination for cause: unvested awards are usually forfeited.

• Termination without cause, death or disability: many plans allow pro rata vesting, with performance awards paid on actual results at the end of the period.

• Sale of the company: US executives commonly expect "double-trigger" acceleration, where unvested awards vest only if the company is sold and the executive loses their job (or their role is substantially reduced) within a defined period.

Forfeiture of unvested LTI is also one of the most effective protections after departure, often more reliable than restrictive covenants, whose enforceability now varies widely from state to state (see our guide to non-compete agreements in the US).

Tax Implications: Section 409A and Other Rules

Section 409A of the Internal Revenue Code governs nonqualified deferred compensation: any arrangement under which an executive earns a right to pay in one year that is paid in a later year. It catches many plans that foreign employers do not think of as "deferred compensation," including phantom stock, some cash LTIPs and poorly drafted bonus or severance clauses.

What Happens If a Plan Fails 409A

The consequences fall mainly on the executive: vested amounts become taxable immediately, before they are paid, with an additional 20% federal tax and interest on top of ordinary income tax. Some states add their own penalty. An executive who discovers that their LTI was badly drafted will rarely blame themselves, so the problem quickly becomes the employer's.

Staying Exempt from 409A

Two exemptions cover most LTI designs:

• Short-term deferral: an award paid no later than the 15th day of the third month after the end of the year in which it vests (March 15 of the following year for a calendar-year company) is generally not deferred compensation. A cash LTIP or phantom plan that pays shortly after the end of each cycle usually fits here.

• Options and SARs at fair market value: stock options and SARs on the employer's stock, with an exercise price at least equal to the fair market value on the grant date, are generally exempt. A SAR measured on a notional value that is not "service recipient stock," for example the value of a division, may not qualify, which is one reason the valuation method matters.

When the Plan Is Deferred Compensation

If an LTI or NQDC plan does pay later, it must follow the 409A rules:

1. Payment only on permitted events: separation from service, death, disability, a fixed date or schedule, a change in control, or an unforeseeable emergency.

2. Elections to defer pay made in advance, generally before the year in which the pay is earned (with specific rules for new hires and for performance-based pay).

3. Strict limits on accelerating payments or postponing them later.

4. For "specified employees" of companies with publicly traded stock, a six-month delay on payments triggered by separation from service.

Other Tax and Accounting Points

• Withholding: payouts of cash LTI, phantom stock, SARs and RSUs are wages. The US employer withholds federal income tax (as supplemental wages, at a flat 22%, or 37% above $1 million in the year), Social Security, Medicare and state taxes, even when the award is granted by the foreign parent.

• Change in control: large payments triggered by a sale can fall under the "golden parachute" rules of Sections 280G and 4999, which impose a 20% excise tax on the executive and deny the company a deduction above certain thresholds. Private companies can often avoid them through a shareholder approval process.

• Accounting: cash-settled awards are liabilities remeasured until payment; equity-settled awards are expensed over the vesting period based on their grant-date value. Check the impact on the consolidated accounts of the group, not only on the US subsidiary.

• Home country: a plan granted by the parent and recharged to the US subsidiary can have tax and transfer pricing consequences in your home country. Involve your group tax team early.

Common Mistakes Foreign Employers Make

• Waiting for the candidate to ask. An LTI improvised during the final negotiation looks improvised. Decide the vehicle and the target value before the search starts.

• Copying the home-country plan. A European deferred bonus or a Japanese retirement allowance does not read as an LTI to a US candidate, and may not comply with 409A.

• Promising "equity" loosely. A sentence such as "you will participate in a future equity plan" in an offer letter creates expectations and, sometimes, disputes. Promise what is documented.

• Ignoring the value of what the candidate leaves behind. Senior candidates often forfeit unvested awards when they resign. A replacement LTI grant, sometimes combined with a sign-on payment, is part of the offer.

• Leaving valuation undefined. For phantom stock and SARs, an undefined valuation method is the single most common source of conflict at payout.

Key Takeaways

• For senior US hires, an LTI is the third pillar of compensation, alongside base salary and annual bonus.

• You do not need US-traded shares: cash LTIPs, performance units, phantom stock and SARs work for private and family-owned groups.

• Use a few metrics the executive can influence, with a threshold, target and maximum defined before each cycle.

• Write the vesting, termination and change in control rules into the plan, and expect candidates to read them.

• Design every plan with Section 409A in mind, ideally within the short-term deferral exemption, and have it reviewed by US counsel.

• Present the LTI as one part of a complete offer, together with salary, bonus and, where relevant, a relocation package.

When we run an executive search for a foreign company in the United States, we raise the LTI question at the very start, because it shapes which candidates will engage and which offers they will accept.