Grant of performance shares: Overview, definition, and example
What is the grant of performance shares?
The grant of performance shares refers to the allocation of company shares to employees or executives as part of their compensation package, with the condition that the shares will only be awarded if specific performance goals or targets are met. These targets are typically based on company performance metrics, such as revenue growth, earnings per share, or other financial and operational goals. The performance shares are usually subject to a vesting period, meaning that the recipient must stay with the company for a certain period before the shares are fully granted or can be sold.
Why is the grant of performance shares important?
The grant of performance shares is important because it aligns the interests of employees or executives with those of the company and its shareholders. By tying compensation to company performance, performance shares provide an incentive for employees to work toward the company’s success. This system encourages productivity, loyalty, and long-term thinking, as employees benefit directly from the company's improved performance. It also serves as a retention tool, as employees must meet performance targets over time to realize the value of their grants.
Understanding the grant of performance shares through an example
Let’s say a company offers its top executives a grant of 1,000 performance shares, with the condition that the company must achieve a 10% increase in annual revenue over the next three years for the shares to vest. If the company meets this target, the executives will receive the shares, which they can sell or hold. If the company does not meet the target, the shares are not granted, and the executives will not receive any additional compensation related to this performance-based plan.
In another example, an employee in a sales role is granted performance shares as part of their incentive plan. The grant specifies that the employee will receive shares if they meet a sales target of $5 million in revenue over the next year. If the employee meets this goal, they will be awarded the shares, which will vest after one year. If the sales target is not met, the employee will not receive the performance shares.
An example of a grant of performance shares clause
Here’s how a clause related to the grant of performance shares might appear in a contract:
“The Company grants the Employee [number] performance shares, subject to the achievement of the following performance goals: [insert specific goals]. The shares will vest after [insert time period] if the performance targets are met, and the Employee remains employed with the Company at the time of vesting.”
Conclusion
The grant of performance shares is a powerful compensation tool used by companies to incentivize employees to achieve key performance objectives. By linking a portion of an employee’s compensation to company performance, it encourages focus on long-term success and enhances employee engagement and retention. Performance shares align the interests of employees with those of shareholders, creating a mutually beneficial scenario where both parties work toward the company’s overall success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.