Performance Shares

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

The goal of performance shares is to tie the interests of executives and managers to the interests of shareholders. Their goal is similar to employee stock-option plans, as they provide an explicit incentive for management to focus their efforts on maximizing shareholder value.

Note that 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.

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 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. The number of 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 timeframe for this assessment 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, 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.

Performance shares may also be granted if a company achieves operational or 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 timeframe wherein the executive or manager is granted voting rights on those shares, even though he or she has 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.