What Are Performance Shares?

Performance shares (as a form of stock compensation) are allocations of company stock given to managers and executives only if certain company-wide performance criteria are met, such as earnings per share targets. Performance shares are meant to drive the management team of a company to prioritize activities that positively impact shareholder value.

Understanding Performance Shares

The purpose of performance shares is to tie the interests of executives and managers to the interests of shareholders. Performance shares have similar goals to employee stock-option plans, as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value. That said, in the case of performance shares, the manager receives the shares as compensation for meeting targets as opposed to stock-option plans where employees receive stock options as part of their usual compensation package.

How Performance Shares Are Issued

In many instances, the distribution of performance shares is based on the company’s performance compared to specific metrics. For example, the shares might only be issued if the company’s stock attains a certain value on the market. Companies may also structure performance share plans based cash flow from operating activities, total shareholder return, return on capital, or a combination of several gauges of how well the company is doing over a set period.

Performance shares may also be granted if a company achieves strategic goals, such as completing a campaign or project by a deadline, improving the internal performance of a division, or securing regulatory approval for a novel product. The company determines the stipulations for performance shares, and there may be a time period wherein the executive or manager is granted voting rights on those shares, even though they have not yet be released from the restricted period. An executive or manager might also have rights to dividends based on those shares, which would be disbursed according to the terms laid out in the compensation agreement.

Restrictions on Performance Shares

The number of performance shares granted can also fluctuate with the overall performance. In such cases, it matters not only that the company meets the goals set but also how the company measures up against those metrics can determine if the executive receives fewer or more shares as a result.

The time frame used for assessing whether performance shares are granted may be over a multiyear period with shares granted annually or at intervals of several years. The value of the performance shares may be subject to market fluctuations outside of the main metrics, depending on the terms under which they are issued. Even after the shares are issued, there may be a mandatory vesting period before the manager or executive can enact any control or ownership of those shares.