Performance Shares: Definition, Purpose, Restrictions

What Are Performance Shares?

Performance shares, as a form of stock compensation, are allocations of company stock given to managers and executives granted only if certain company-wide performance criteria are met, such as earnings per share (EPS) targets.

Performance shares are meant to drive the management team of a company to prioritize activities that positively impact shareholder value.

Key Takeaways

  • Performance shares are an incentive-based form of stock compensation paid to corporate managers or executives if certain benchmarks are met.
  • Employees are often granted performance shares in the form of bonuses and/or stock options.
  • Performance shares help align the goals of managers and other employees with that of shareholders.

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 (ESOPs), as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value.

In the case of performance shares, the manager receives company shares or stock options as compensation for meeting targets as opposed to traditional stock-option plans where employees receive stock options as part of their usual compensation package. Thus, it is a form of performance-based compensation paid out to employees that have performed at an extremely high quality or have met or surpassed pre-set milestones or benchmarks.

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 on 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, what matters is not only that the company meets the goals that are set out, but also that the number of shares received by executives depends on how well the company measures up against those metrics.

The timeframe used for assessing whether performance shares are to be granted can vary. The actual value of the performance shares may also be subject to market fluctuations outside of the primary performance metrics used. Even after the shares are issued, there may be a mandatory vesting period before the recipient can take control or ownership of those shares.

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