CFO Incentive Plans Explained: STI, LTI and What to Ask Before You Sign
For many CFOs, incentives make up a large part of the package. Sometimes they are the part that matters most.
Yet many finance leaders, people who read contracts and plan rules for a living, sign their own offer without fully understanding the incentive terms. They focus on base salary, glance at the bonus percentage and trust the rest will work out.
It often does not. Targets change. Plans are amended. A sale happens, or a restructure, and the unvested part of the package disappears.
This article is general information only. It is not legal, tax or financial advice, and rules differ between Australia and New Zealand and between plans. It covers how short-term and long-term incentives work, common targets and performance conditions, vesting and leaver terms, what happens on a sale or change of control, the questions to ask and when to get advice.
How short-term and long-term incentives work
Most senior packages have three parts: fixed pay, a short-term incentive (STI) and, in some businesses, a long-term incentive (LTI).
Short-term incentive. Usually tied to one financial year. You are set targets at the start of the year, and a payment is made after year-end if those targets are met. The payment is often expressed as a percentage of base salary, with a target level and sometimes a maximum level.
Long-term incentive. Usually measured over three years or more. It is often delivered as shares, options, performance rights or a cash plan linked to company value. The aim is to keep you focused on long-term value and to encourage you to stay.
Private equity-backed businesses often use a different model. Instead of a standard LTI, senior managers may be invited to invest in the business alongside the fund, with a return linked to the sale price. See private equity-backed executive roles for how those businesses tend to run.
Each plan is different. The headline percentage tells you very little until you have read the rules.
Common targets and performance conditions
STI targets usually mix company measures and personal measures.
Company measures might include earnings, revenue, cash flow, return on capital or safety results. For a CFO, these are often weighted heavily.
Personal measures might include delivering a system project, refinancing debt, improving reporting or building the team.
There is often a gateway. If the company does not reach a minimum earnings level, no STI is paid at all, however well you performed personally.
LTI performance conditions are usually longer and harder to influence. Common ones include:
Total shareholder return compared with a peer group
Earnings per share growth over three years
Return on capital targets
Share price or company value at a set date
Ask how each measure is calculated, who decides whether it is met and whether the board has discretion to change the outcome. Most plans give the board wide discretion. That can work for you or against you.
Vesting, good leaver and bad leaver terms
Vesting is when an incentive becomes yours. Until it vests, it can usually be lost.
Time-based vesting means you must still be employed on a set date.
Performance-based vesting means conditions must also be met.
Leaver terms set out what happens if you leave before vesting.
Good leaver. Often covers redundancy, ill health, death or sometimes retirement. A good leaver may keep some or all unvested awards, often pro-rated for time served.
Bad leaver. Often covers resignation or dismissal for cause. A bad leaver usually loses all unvested awards and sometimes must sell vested shares back at a low price.
The definitions matter a great deal. In some plans, resigning for any reason makes you a bad leaver. In others, the board decides case by case. Read these clauses slowly, and ask for examples of how they have been applied.
What happens on a sale or change of control
A sale, merger or takeover can change everything.
Some plans allow full or partial vesting on a change of control. Others leave it to board discretion. Some private equity plans only pay out at the point of sale, so the timing of the deal decides the outcome.
Questions to ask:
Does any unvested award vest on a change of control? All of it, or a pro-rated part?
Are performance conditions tested at the sale date, or waived?
If the buyer offers a new plan, must I accept it?
If my role ends after the sale, am I treated as a good leaver?
For a CFO, a sale is a real possibility in many businesses. You will likely be running the process. Know where you stand before you start.
How search consultants see it
When I worked in executive search, incentive terms were one of the most common reasons an offer stalled late.
The pattern was usually the same. The candidate agreed the base salary, then received the contract and plan rules a few days before the start date. Questions about vesting or leaver terms then came up under time pressure, and both sides felt frustrated.
The candidates who handled it well asked for the plan rules early, often at second interview or as soon as an offer was likely. They asked clear, polite questions and let the client respond in writing. Clients respected that. It showed the same care they wanted their CFO to bring to the business.
Questions to ask before you sign
Ask for the plan documents, not just the offer letter. Then work through these.
About the STI:
What are this year’s targets, and how were they set?
What has the plan paid out in each of the last three years?
Is there a gateway, and what happens if it is missed?
Is the payment pro-rated if I start part way through the year?
Can the board change the targets mid-year?
About the LTI:
What form does it take, and how many units or rights are granted?
What are the performance conditions and test dates?
Has the plan vested in previous years?
What are the good leaver and bad leaver definitions?
What happens on a change of control?
About your current plan:
What will you forfeit by leaving now?
Will the new employer consider compensating for that loss?
That last question is common at senior level. Some employers will offer a sign-on award to replace what you give up. Others will not. You will not know unless you ask. For how to raise it, see executive offer negotiation.
When to get advice
Get advice before you sign, not after.
A lawyer who works with executive contracts can explain the plan rules, leaver terms, restraints and change of control clauses, and how they interact with your employment contract.
A tax adviser can explain how and when each incentive is likely to be taxed. Equity-based plans in particular can have tax effects that surprise people, and the rules in Australia and New Zealand are not the same.
A financial adviser can help you think about how much of your wealth sits in one company.
The cost of good advice is small compared with the value of most senior incentive plans. It is also normal. Boards expect a CFO to read the fine print.
A quick self-check
Do you have the full plan rules, not just the offer letter?
Do you know how your STI is measured and what it has paid before?
Do you know what happens to your LTI if you resign, are made redundant or the business is sold?
Have you spoken to a lawyer and a tax adviser?
Your next step
Before your next offer conversation, write down the five incentive questions that matter most to you and ask for the plan documents as early as you can.
If you want help with weighing up a senior offer, my executive career transition support helps senior leaders compare offers, prepare for negotiation and move with confidence.
If you have an offer in front of you and want a clear head before you sign, book a complimentary Clarity Session.
