Short-Term Incentives (STI) Are Common Across Sectors

Almost all for-profit companies provide short-term incentives (STIs), whether they are publicly traded or privately held. Short-term incentives are an effective way for companies to focus employees on the near-term objectives of the business, incentivize behavior that drives achievement of those objectives, and reward employees for their performance and contributions. STIs include programs such as annual incentive plans, spot awards, discretionary bonuses, and retention bonuses.

Short-Term Incentive Spend Varies Significantly Across Sectors

Short-term incentives represent a meaningful portion of operating income, typically around 5% to 15% at public companies, so it is important to ensure that this expense is accomplishing the right objectives. The majority of survey respondents rated their short-term incentive programs as effective, very effective, or extremely effective – with 86% of public companies, 72% of private companies, and 62% of nonprofits providing these ratings.

This association between STI spending and perceived effectiveness has a dual focus: Organizations are willing to invest more in programs they believe are working, and award values must also be meaningful enough to influence employee behaviors.

Target AIP Opportunities Vary by Sector and Employee Level

Annual incentive plans (AIPs) are the predominant form of STI program across all sectors. As expected, public companies have the highest target annual incentive opportunities, with the difference more accentuated at the executive level. Annual incentive target opportunities at public companies are about 25 percentage points above that of private companies for chief executive officers (CEOs) and CEO Direct Reports, but the difference disappears at the Salaried Professional level and below.

This distinction in target incentive levels is primarily due to size, with public companies having greater revenue and organizational complexity, which correlates with higher executive pay. At lower levels of the organization, target incentive levels are based on functional role and responsibilities, not on size and scope of the organization.

Other Forms of Short-Term Incentives Are Used for Various Purposes

While annual incentive plans are the most prevalent form of short-term incentives across organization sectors, many other types of plans are also used. Almost 60% of public companies and ~50% of other organizations use two or more short-term incentive plans.

Private companies, nonprofits, and government organizations all make relatively greater use of discretionary bonuses, spot awards, and retention bonuses to reward employees. Smaller organizations may have closer manager oversight, making judgement-based performance assessments easier to manage. They also like the flexibility provided by these plans over fixed and formulaic plans.

Below the executive level, companies use targeted awards to address specific recognition and retention needs. Approximately 40% of both public and private companies provide spot awards to managers and below, especially to hourly workers. Roughly 25% of public and private companies use retention bonuses for managers and salaried professionals, but not as much for hourly workers. The greater use of these awards below the executive level reflects their role as targeted tools designed to recognize immediate contributions and retain employees in critical roles.

Taken together, the survey findings show that short-term incentives provide a broadly shared foundation across sectors. Public and private companies both rely primarily on annual incentive plans and supplement them with some discretionary awards, with differences appearing mainly in executive opportunity levels and the degree of discretion used. These distinctions are meaningful, but they are variations within a common model.

Long-term Incentives (LTI) Are the Defining Divide Across Sectors

Long-term incentives (LTIs) present a more fundamental divide across sectors, with ownership structure shaping whether programs are offered, who participates, and what forms of compensation are practical to deliver.

Like STI usage, LTI usage is nearly universal among public companies (95% prevalence), but this pattern does not hold across the other sectors. Only 61% of private companies, 26% of nonprofits, and 16% of government organizations utilize any type of LTI program.

The primary purpose of an LTI program, as reported by survey respondents, is to align employee rewards with the long-term goals of the organization. As the main goal for any for-profit organization is to increase stockholder value, public companies have the unique advantage of readily available and liquid stock that is inherently tied to company valuation.

Designing an LTI program for a company that is not publicly traded is a more complex endeavor. Lack of a built-in valuation mechanism, liquidity constraints, and an absence of publicly available peer data for relative performance measurements all add to the difficulty. The effect of these factors can be seen in the different LTI vehicle design choices among public and private companies.

Public companies overwhelmingly use equity vehicles for their LTI programs. The most prevalent vehicles are restricted stock units (RSUs) and performance shares, which are full-value share plans as opposed to appreciation-only plans such as stock options. Most private companies, on the other hand, use a long-term cash plan, typically based on a profitability goal over a three-year performance period.

Public companies typically use a portfolio of LTI vehicles: only 27% use one vehicle vs. 63% of private companies that use one vehicle for their LTI plans. Combining time- and performance-based equity vehicles allows public companies to address retention and long-term performance through distinct but complementary awards. Private companies are more likely to rely on a single vehicle to accomplish both objectives.

The additional complexity of implementing LTIs at private companies also affects how deeply awards extend into the organization. Where an LTI program exists, participation is generally 100% for CEOs, direct reports to the CEO, and other executives at both public and private companies. Participation declines more sharply below the executive level at private companies. Public companies report participation of 50% for managers and 21% for salaried professionals, compared with just 25% and 16%, respectively, at private companies.

Long-Term Incentive Design Varies by Employee Level

LTI award design also changes for lower employee levels in the organization. At public companies, 75% of CEOs and 61% of other executives receive a combination of time-based and performance-based awards. Performance awards for executives are also meaningfully leveraged, with a typical maximum opportunity of 200% of target. At lower levels in the organization, public company awards become predominantly time-based: 65% of manager awards and 72% of salaried-professional awards are entirely time-based. This progression allows companies to reward long-term performance for senior leaders who have the clearest line of sight to long-term value creation, while using simpler time-based equity primarily to support retention deeper in the organization.

Performance-based LTI design also reflects the availability of public-market reference points. Nearly 65% of public companies combine absolute and relative performance measures in their performance-based LTI plans. In contrast, 73% of private companies rely solely on absolute company performance. Observable share prices, established market indices, and publicly reported peer results make relative performance comparisons readily accessible to public companies. Private companies must rely more on absolute profitability, growth, returns, and strategic measures that can be evaluated using internal results.

Public company LTI practices tend to be more standardized than private company practices. Annual grants are used by 93% of public companies, compared with 74% of private companies, and three-year vesting (or performance periods) are used by 81% of public and 57% of private companies, respectively.

This greater LTI design convergence among public companies is consistent with the homogeneous set of external expectations created by large institutional shareholders and proxy advisory firms. Private companies answer to more varied ownership bases and face different liquidity, succession, and retention considerations, often requiring more tailored LTI program designs. In addition, private companies are not subject to the same level of public disclosure and scrutiny.

Target LTI Opportunities Vary by Sector and Employee Level

The economic value of LTI awards provides the sharpest distinction between public and private company practices. This difference in target opportunities is even more pronounced for LTIs than annual incentives. Part of this distinction comes from the difference in the “cost” of delivering LTIs between these types of organizations. Public companies overwhelmingly deliver LTIs through equity vehicles, so the cost is not a direct cash outflow like it is for a private company; instead, the cost is primarily the dilutive impact to existing shareholders.

This difference in target LTI opportunities is most meaningful at the very top of the organization. The target LTI opportunity is 400% of salary for public company CEOs, four times the 100% of salary at private companies. For direct reports to the CEO, the target LTI opportunity is more than double at public companies. The difference narrows substantially below this level and converges at the Manager/Supervisor level where both public and private companies have an LTI target of 20% of salary.

While a top executive role at a public company can be more complex due to the regulatory requirements and investor relations considerations involved in running a public company, there are additional reasons for the higher LTI opportunities. Since public companies must disclose compensation for their CEO, CFO, and next three highest-paid executives in their annual proxy statement, they must consider investor feedback, proxy advisor influence, and any potential market signaling when setting compensation for this group. Additionally, compensation is benchmarked against top executives at other public companies, creating a comparison set concentrated among the most senior and highly paid roles, which further reinforces the higher incentive opportunities. These dynamics help explain why the public company premium is most pronounced for CEOs and their direct reports but narrows considerably further down the organizational hierarchy where jobs are more similar across sectors.

Nonprofit and Government Practices Require a Separate Lens

Nonprofit incentive programs occupy a distinct position in comparison to for-profit programs. Incentive plan prevalence is materially lower at nonprofit organizations. In our survey sample of 98 nonprofit organizations, about two-thirds use short-term incentives and only one-quarter use long-term incentives. Nonprofit annual incentive plans place less emphasis on financial performance and greater emphasis on individual, operational, and mission-related outcomes. This comes through in the broader use of incentive metrics. Almost half (48%) report using five or more AIP measures, compared to only 18% of for-profit companies.

Among nonprofits with LTI programs, long-term cash with a three-year performance period is the most prevalent plan design (as real equity does not exist for nonprofits). Approximately 84% of nonprofit organizations rate their LTIs as effective, very effective, or extremely effective in achieving the objectives of rewarding for long-term goal achievement, improving retention, and being competitive with other employers.

In our sample of 32 government organizations, the use of incentive pay is even lower than nonprofits, with only 44% using STIs and 16% using LTIs. AIPs remain the dominant form of STI, supplemented with discretionary and spot awards, particularly at the manager level and below.

In Conclusion

Short-term incentives provide a common foundation across organization sectors, and long-term incentive practices differ based on the fundamental differences in ownership structures. All incentive practices should ultimately be centered around supporting the organization’s mission and strategy and accomplishing the goals of aligning pay with performance, retaining critical employees, and properly rewarding them for their work.

For survey users, the most useful comparison will rarely be based on organization sector alone. Company size, industry, and, for private companies, family or private-equity ownership may materially affect the appropriate reference group. Ultimately, the goal is not to simply mirror market practice but to shape incentive programs that fit each organization and advance its priorities.