The Interaction Between Long-Term Incentives and Purpose-Driven Organizations
Sep 8, 2025
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This article explores how long-term incentive plans (LTIPs) can be effectively implemented at purpose-driven organizations by first distinguishing these entities from traditional, profit-driven models, identifying the types of LTIPs commonly used across such organizations, and highlighting the unique limitations and key considerations—particularly around performance metrics—that must be addressed to ensure alignment with mission and stakeholder values.
What are Purpose-Driven Organizations?
The generally accepted definition of a purpose-driven organization is one that primarily operates to fulfil a social, community or member-oriented mission rather than focusing solely on profit generation or financial returns to shareholders. We will exclude publicly-traded purpose-driven organizations as while they may support social causes, their ultimate goal arguably is to increase shareholder value, which can conflict with the more accepted definition.
Examples of Purpose-Driven Organizations
Credit Unions
Member-owned financial cooperatives designed to provide banking services such as savings accounts, loans, and credit products. Their core mission is to improve the financial well-being of their members rather than maximize profits.
Mutual Organizations
Mutuals, such as mutual insurance companies, are owned by their policyholders or members. Profits are typically reinvested to improve services or reduce member costs (whether by reduced premiums or improved coverage).
Cooperatives
Co-ops are enterprises owned and democratically governed by their members, whether they are workers, consumers, or producers. Their goal is to meet the collective needs of their members.
Non-Profit Organizations
Typical non-profits exist to fulfill a defined public benefit or mission (such as education, health, or social welfare) without distributing profits to owners or shareholders.
Foundations and Trusts
These entities manage assets for the sole purpose of supporting charitable or public interest goals, often through grants or strategic investments.
Significance of LTI at Purpose-Driven Organizations
As with any organization, LTI can be an important element of total compensation as it focuses on multi-year performance to encourage employee retention and achievement of long-term goals or organizational milestones. That said, incentive plans have not been used historically at purpose-driven organizations for some of the reasons below:
§ Funding constraints: Budgets typically come from donations, grants, or government funding, leaving less flexibility for performance-based pay or adding additional elements of compensation (especially if these elements may be seen as being at the expense of fulfilling the organization’s purpose)
§ Internal equity concerns: Incentives (if only provided to certain levels in the organization) could create internal issues due to perceived unfairness that value worth rewarding is only open to select employees
§ Measurement challenges: It is harder to define "success" if outcomes are difficult to quantify, i.e. social, environmental, or educational objectives
Despite the above, incentive pay at purpose-driven organizations has become more prevalent over time. Based on our mandates with various purpose-driven clients, LTIPs are becoming more common for organizational strategic alignment with the executive team. As well, we witness increasing comfort with a management LTIP where a Board has Directors that have participated in an LTIP. From our CGP compensation databases and the GPC 2025 Corporate Governance Best Practice Survey, 42% of not-for-profits indicated that their executives receive LTI. While most purpose-driven organizations do not have access to share-based LTI, it remains a key tool to reduce gaps in compensation to market and to shift emphasis on fixed compensation or short-term goals to long-term organizational goals aligned with their overall purpose.
Unique Challenges in Designing LTI Plans for Purpose-Driven Organizations
The main difference between LTI at purpose-driven organizations vs more traditional organizations is the type of LTI vehicles used and the metrics that drive them. Some specific challenges with designing LTIPs for purpose-driven organizations are:
§ No stock price or equity to base incentives on – Without equity or share price, traditional LTIP tools like stock options or performance shares are not available without heavy approximation
§ Difficulty quantifying long-term ‘returns’ that are social or stakeholder-based – Success is often defined by social impact or stakeholder value, which is harder to measure and track than financial returns
§ Governance complexity (e.g., member Boards, public accountability) – Multiple stakeholders and oversight bodies make it challenging to align on and approve incentive structures, especially for entirely new incentive plans
Case studies
Two examples where CGP has successfully implemented LTI plans at purpose-driven organizations:
Example 1 | Example 2 | |
Organization Type | Provincial credit-union | Not-for-profit organization that required long-term capital planning and management for a significant new construction |
Plan type | Long-term cash plan | Hybrid plan, combining a traditional long-term cash plan with a small deferred component |
Rationale | Ensure long-term retention and tie performance metrics to long-term corporate performance while maintaining simplicity | Combining these two plan types was to encourage retention in-line with typical LTI plans (i.e. 3 years), while recognizing the presence of medium-term milestones that required a shorter performance cycle |
Performance & Payout Period | The payouts in this plan were determined at the end of a 3-year performance period. As the performance metrics were measured over a longer period, it was less appropriate to have a ratable vesting schedule (e.g. 1/3 every year for plan duration) with interim performance targets. | At the forefront, this was a 2-year plan, with performance evaluated at the end of the period based on metrics such as permits obtained, construction progress, and health and safety implementation. A portion of the incentive would be paid out at the end of year 2 and the remainder at the end of year 3 (resulting in a 1-year deferral). |
General Guidelines for a Well-Designed LTIP
We have outlined the rise of LTI at purpose-driven organizations, the unique challenges they present, and two real world examples. As you explore alternatives for LTIPs at your organization, please keep the following guidelines in mind:
§ For “steady state” organizations (i.e. organizations that are not contemplating major strategic shifts), it is generally more common for LTIPs to have fewer KPIs compared to short-term incentive plans
§ KPIs at purpose-driven organizations (excluding financial services organizations) can often be more heavily based on business-critical strategic objectives or project milestones that are directly related to achieving their purpose
By contrast, KPIs at non-purpose-driven organizations are generally profit- or return-based (e.g. EBITDA, ROE) that reflect their ultimate accountability to provide financial returns to their major stakeholders
§ KPIs should be reviewed and adjusted regularly by the Board and management to ensure that they are still aligned with organization goals
If you would like more information on LTIPs or help with designing or reviewing your organization’s LTIP, please contact CGP.
