Welcome back. In this lesson, we're talking about long-term incentives, starting out with defining, what are long-term incentives? So long-term incentives are incentives that tie long-term rewards to a company's long-term performance. And so how would they do this? Well, typically these are going to work because we're going to measure performance in terms of the share price, that's going to be the key performance indicator, and the main way that we're going to reward them are using rewards who's value is also tied to the share price. So again, long-term incentives are just one element of the pay mix. The pay mix includes base cash, short-term incentives, long-term incentives and benefits and perquisites. And so, why use long-term incentives? While long-term incentives, unlike the other elements, the pay mix, can be very valuable when it comes to communicating with employees. Long-term incentives, as an element of the pay mix, communicates to employees, that they are, that they own a little piece of the firm. That they have a sense of shared prosperity of things go well and they also are an important retention tool because if the share price goes up, then the value of their stock options and other rewards will be very high and then will encourage employees to stay with the organization. So before we go into how those work, we have to define some terms. First of all, we have equity. Equity is a piece of a company, and equity is measured in terms of shares. Shares are a piece of the company, essentially a piece of the company and it's a unit of equity. So shares, as they're traded, of publicly traded companies can be traded like anything else. And the share price is the price that is associated with purchasing that share of the company. So let's take an example. Suppose you buy one share of the Coca-Cola company. Well, that price on the open market is worth 42 dollars. And that one share means that you on about one four-billionth of the Coca-Cola Company. And as an owner of that one share, you're entitled to get some of the dividends of the Coca-Cola Company when it is profitable. And that's why those shares are valuable because the more shares you have, and the more those shares are worth, you have that expectation that when it pays dividends, that those dividends will be very valuable. So let's look at some of the forms that long-term incentives take. So one method that's very common is stock options. Sp stock options you might get at any time. For example, if you join an organization and you do well, the organization might reward you with long term incentives such as a stock option grant. And so this is going to be very valuable to you when the price of the stock goes up, assuming that you're still with the organization. That's because for stock options you're only going to be allowed to exercise the option to purchase the stock at that price assuming that you're still with the organization. And that's going to be particularly valuable if the stock price goes up. If you're confused then don't worry because it's going to be the topic of our next video. There's also performance shares. Performance shares are restricted stocks that you are granted when the price hits a certain target. So for example, if you get a stock grant of however many shares, if the Coca-Cola stock goes up to $50 dollars per share and that would be valuable that grant, the grant of those stock would be valuable assuming that the price does go up to $50 per share. There's also stock grants, so stock grants you can get any time as well and they are also valuable immediately when you get it. Then also there's phantom shares and phantom shares are a lot like stock grants except unlike normal shares they don't have the same voting rights that ordinary equity ownership would have. So next up we'll go into some details about what are stock options and how their value is calculated. Thanks and I'll see you next time.
