If you’re a participant in a Long-Term Incentive Plan (LTIP), you may wonder how signing a settlement agreement could impact your LTIP benefits. LTIPs are performance-based reward schemes offered by many companies to incentivize and retain high-level employees by granting them shares, options, or cash bonuses contingent upon meeting certain performance or service-based targets over several years. LTIPs can represent a substantial part of your total compensation, so it’s essential to understand how a settlement agreement might affect your entitlements under the plan.

Here’s a detailed look at how LTIPs work, how settlement agreements can impact them, and the factors to consider when negotiating.

1. Understanding LTIPs and Vesting Schedules

Most LTIPs are structured with specific vesting schedules, meaning that rewards, such as shares or bonuses, are distributed over a set period rather than upfront. Vesting usually depends on:

• Performance Conditions: Specific targets, like revenue growth, stock performance, or profitability, that must be met.
• Service Conditions: A requirement that you remain employed for a certain period, such as three to five years.

If you meet these conditions, you’re eligible to receive the LTIP benefits as they vest. However, if you leave the company before full vesting, your entitlements may be affected. In many cases, LTIPs have forfeiture clauses stating that unvested portions of the plan are lost upon termination.

2. LTIPs and Settlement Agreements

Signing a settlement agreement typically means that your employment is coming to an end, which raises the question of what happens to your LTIP. Here’s how a settlement agreement might impact your LTIP:

a) Forfeiture of Unvested LTIPs

Most LTIPs include provisions stating that if you leave the company voluntarily or are dismissed, any unvested shares, options, or awards will be forfeited. Settlement agreements often uphold these provisions unless negotiated otherwise. If no special arrangement is made in your settlement, you risk losing any unvested portion of your LTIP upon leaving.

b) Accelerated or Partial Vesting

In some cases, it’s possible to negotiate accelerated or partial vesting as part of your settlement agreement. This is particularly relevant if you’re close to a vesting milestone. Employers may agree to accelerate vesting or allow a portion of unvested awards to vest as a gesture of goodwill or to avoid potential legal claims.

For example, if you have an LTIP due to vest in six months and are leaving under a redundancy arrangement, you might negotiate for a partial payout based on your progress towards the target. Discussing these possibilities with your solicitor is critical, as accelerated vesting requires specific approval from your employer.

c) Treatment of LTIP in Redundancy Situations

Many companies offer more favorable treatment for LTIPs in redundancy situations, recognizing that the departure wasn’t voluntary. Settlement agreements related to redundancy may include terms allowing for pro-rata vesting, where you receive a portion of the LTIP based on the percentage of the vesting period you’ve completed.

For instance, if you’re halfway through a three-year LTIP cycle at the time of redundancy, you may be entitled to 50% of the potential award, assuming performance conditions have been met.

3. Key Factors to Consider When Negotiating LTIP Terms in a Settlement Agreement

If you have a significant LTIP and are approaching a settlement, it’s essential to address how it will be handled. Here are the main factors to consider when negotiating LTIP terms in a settlement agreement:

a) Vesting Terms and Conditions

Review your LTIP documentation to understand the vesting terms and conditions. Some LTIPs have “good leaver” provisions that may allow for continued vesting or pro-rata payouts in cases of redundancy, unfair dismissal, or retirement. Knowing the specific terms of your LTIP will help you and your solicitor negotiate the best possible outcome.

b) Performance Conditions and Progress

Assess where you stand relative to the performance conditions tied to your LTIP. If you’ve met some or all targets, you may have a stronger case for partial vesting. If targets aren’t achievable by the time of your departure, the likelihood of negotiating favorable LTIP terms may be lower.

c) Negotiating Pro-Rata Vesting

Pro-rata vesting allows you to receive a portion of your LTIP based on your tenure within the vesting period. For example, if you’ve completed 75% of the vesting period, you might negotiate to receive 75% of the potential award. This approach is particularly useful in redundancy situations or for employees close to retirement.

d) Accelerated Vesting for Imminent Awards

If you’re close to a vesting milestone, such as a year-end performance assessment or an upcoming award date, accelerated vesting may be negotiable. Your solicitor can help make the case for accelerated vesting, especially if the employer is motivated to avoid prolonged disputes.

4. Tax Implications of LTIPs in a Settlement Agreement

The tax treatment of LTIPs can vary depending on the structure of the plan and the terms of your departure:

• Income Tax on Cash Awards: If your LTIP includes cash bonuses, these are typically subject to income tax and National Insurance contributions.
• Tax on Shares or Stock Options: If you receive shares, tax treatment can vary. You may be subject to Capital Gains Tax (CGT) if you sell the shares or income tax if they’re exercised as options. Ensure you understand the tax implications of any LTIP benefit included in the settlement.
• Potential for Tax Deferral: Some LTIPs offer tax-deferral options, allowing you to pay taxes only when you sell the shares. However, this may be affected by the terms of the settlement, so discuss tax matters with your solicitor to ensure compliance and optimize your tax position.

Having a solicitor review the tax implications of your LTIP in the settlement agreement ensures that you aren’t faced with unexpected tax liabilities.

5. Working with a Solicitor to Protect Your LTIP Rights

Given the complexity of LTIPs, it’s critical to work with a solicitor who specializes in employment and compensation matters. Here’s how they can help:

• Assessing the LTIP Terms: A solicitor can review the terms of your LTIP to determine what rights you may have if you leave the company. They’ll check for “good leaver” clauses, pro-rata vesting options, and any applicable performance conditions.
• Negotiating with Your Employer: If you have a strong case for retaining or partially vesting your LTIP, your solicitor can negotiate with your employer on your behalf. This may involve advocating for pro-rata vesting, accelerated vesting, or retention of a portion of the award.
• Addressing Tax Issues: Tax treatment on LTIPs can be complex, and a solicitor can help ensure your settlement agreement handles these matters properly, so you’re not faced with unexpected tax costs later.
• Ensuring Fair Treatment in the Settlement Agreement: Finally, a solicitor ensures the language around LTIPs is clear and legally binding in the settlement agreement, reducing the risk of misunderstandings or non-compliance by the employer.

6. Common Challenges and How to Overcome Them

Negotiating for LTIP entitlements as part of a settlement agreement can be challenging, particularly if your departure was not amicable. Here’s how to overcome common hurdles:

• Employer Resistance: If the employer resists including LTIP terms in the settlement, emphasize your contributions to the company’s long-term goals and how your retention was tied to the LTIP. Show that honoring the LTIP aligns with industry norms for fair treatment in exit agreements.
• Timing Constraints: Employers may argue that your unvested LTIPs are not eligible because they are not yet vested. In these cases, seek partial or pro-rata vesting as a compromise if you’ve contributed substantially toward performance targets.
• Ambiguities in the LTIP Documentation: If the LTIP documentation is unclear on how departures affect vesting, your solicitor can help clarify these points and negotiate favorable interpretations.

Final Thoughts

LTIPs can represent a significant portion of your total compensation, so it’s essential to understand how a settlement agreement could impact these benefits. While forfeiture of unvested LTIPs is common in many cases, there may be room to negotiate partial or pro-rata vesting, particularly in redundancy or involuntary exit situations.

Working closely with a solicitor ensures that you fully understand the terms of your LTIP, negotiate for any entitlements you may be eligible for, and address any tax implications. By carefully reviewing and negotiating your settlement agreement, you can maximize the benefits from your LTIP and secure a fairer outcome as you transition to your next opportunity.