What are Performance Shares?

What are Performance Shares?

Performance shares are a sort of equity pay given to employees, primarily executives and key employees, based on the achievement of specific company performance goals.  

While the general concept is like traditional stock options or restricted stock units (RSUs), performance shares are contingent on the achievement of certain company or individual goals. These metrics can include financial targets, operational goals, or even market-based measures like total shareholder return.

How do Performance Shares work?

Performance shares operate on a framework where the company sets performance goals that must be met for the shares to be awarded. The goals are often measured over a specific period, such as three to five years. Employees receive the shares only if the company achieves these goals. This structure motivates employees to work towards the company's long-term success

Features of Performance Shares

1. Conditionality: Performance shares are contingent on meeting predetermined performance benchmarks set for the company or employee.

2. Vesting Period: There is typically a vesting period during which the performance goals must be met.

3. Alignment with Company Goals: Performance shares can be a good way of motivating employees by linking their reward with the company’s performance.

4. Non-Dilutive: Performance shares are usually non-dilutive, meaning they do not immediately increase the number of outstanding shares.

5. No Immediate Tax Impact: Employees are not taxed on performance shares until they vest and are converted into actual shares.

Benefits of Performance Shares

1. Incentivizes Performance: Tying compensation to performance metrics ensures that employees are motivated to achieve company goals.

2. Employee Retention: The vesting schedule motivates employees to stay with the company for an extended period.

3. Aligns Interests: Employees' interests are aligned with those of shareholders, fostering a unified goal of company success.

4. Potential for Significant Rewards: If the company performs well, employees can receive substantial financial benefits.

5. Deferred Taxation: Employees do not incur taxes until the shares vest and become actual shares.

FAQs on Performance Shares

1. When do performance shares vest?

The performance shares have a lock in period where they only vest if the set performance targets are met within the stipulated timeframe based. Performance share vesting period may take one to five years depending on the company's plan.

2. What are performance rights shares?

Performance rights shares are a form of performance-based equity that grants the holder the right to receive shares upon meeting specific performance criteria. They have no value in the equation before the performance conditions are met.

3. What are performance share units?

Performance share units (PSUs) are a form of performance shares that represent a promise to grant shares in the future based on the achievement of performance targets. PSUs are used to align employees' incentives with company performance over a set period.

4. What are the risks of performance shares?

The primary risk associated with performance shares is that if the company fails to meet the performance targets, the shares are forfeited, and the employee receives nothing. Additionally, there is the risk of stock price volatility, which can impact the value of the shares once they vest.

5. Why do companies issue Performance Shares?

The primary use of Performance Shares is in motivating executives to focus on attaining long-term strategic organizational goals that add value to shareholder’s worth. When compensation is tied directly to performance, organizations see this as a way of promoting accountability and leadership that delivers results.