Many companies use long-term incentives (LTI) but treat them like an extended bonus. This is understandable, but often a strategic mistake. Because although LTI and bonuses may seem similar at first glance, they pursue fundamentally different goals.

Let’s take a closer look at their similarities and differences. 

Similarities: More Connection Than You Think 

At first glance, LTI and bonuses do indeed come from the same “compensation family.” 

Both LTI and bonuses: 

• are variable compensation components
• can be part of a comprehensive compensation strategy
• their amount depends on defined target criteria
• generally require an ongoing employment relationship
• are (at least to some extent) considered employment income for tax purposes
• are often legally structured as a salary component or bonus

This sounds very similar at first. 

The crucial differences 

Precisely because the similarities are so obvious, a closer look at the differences is worthwhile. They are strategically crucial. 

1. Past vs. Future

Traditional bonus models generally reward past performance, typically after the end of a fiscal year. An LTI, on the other hand, looks ahead: It creates a tool to monitor and reward future developments. The focus is clearly on future performance. 

2. Short-term vs. Long-term 

Bonus models usually follow annual target-setting, evaluation, and payout cycles. Long-term incentives (LTIs), on the other hand, are designed to run for several years. Often three years, sometimes four or five. In practice, these cycles often overlap, so that each year a new cycle begins while an existing one ends. This creates a significantly more sustainable perspective. Short-term fluctuations or planning uncertainties have a less pronounced impact. 

3. Individual vs. Company 

Traditional bonus models often focus on individual performance, sometimes supplemented by team or company goals. An LTI follows a different fundamental principle: “We’re all in this together.” The focus is not on individual contributions, but on the development of the entire company. Typically, strategic or financial goals at the company level are evaluated—or directly, the development of the company’s value. 

What does this mean for companies? 

In summary, a long-term incentive (LTI) is, compared to traditional bonus models: 

• more forward-looking
• more long-term oriented
• more sustainable in its impact

It can help to: 

• retain key personnel over several years
• promote entrepreneurial thinking and action
• better align the interests of employees and owners

Additional effects of LTI models 

Depending on its design, an LTI can also achieve effects that traditional bonus models cannot offer. These include, for example: 

• relief for the company’s short-term liquidity
• potential tax advantages for employees

However, these aspects deserve a more in-depth look (more on this another time). 

Conclusion 

While LTIs and bonuses come from the same family, they are very different siblings. 

It is worthwhile for companies to consciously understand these differences and use them strategically. Because when used correctly, long-term incentives are far more than just a “bonus with a longer duration.” They are a strategic instrument forsustainable corporate development. 

If you have any questions or require further assistance, please feel free to contact us at any time.