Performance Shares

Definition

Performance shares are a type of equity-based compensation that grants company stock to employees based on achieving specific performance goals. This incentive aligns the interests of employees and shareholders by rewarding individuals for contributing to the company's long-term success, often measured through metrics like earnings per share or total shareholder return. The ultimate value of performance shares can fluctuate depending on the company’s performance relative to these predefined targets.

5 Must Know Facts For Your Next Test

1. Performance shares usually have a vesting period, meaning that employees must stay with the company and meet performance goals for the shares to fully belong to them.
2. The performance metrics used to determine the value of performance shares are often tied to the company's strategic objectives, encouraging employees to focus on key business outcomes.
3. These shares can significantly enhance employee motivation and retention, as they provide a tangible benefit linked directly to their contributions towards company success.
4. If the defined performance targets are not met, employees may not receive any shares, making this form of compensation higher risk but potentially more rewarding than traditional salary increases.
5. Performance shares can lead to tax implications for both the company and the employee, influencing how these incentives are structured within compensation plans.

Review Questions

• How do performance shares align the interests of employees and shareholders?
  • Performance shares align the interests of employees and shareholders by tying employee compensation directly to the company's performance. When employees are rewarded with shares based on achieving specific performance goals, they become more invested in the company's success. This alignment fosters a shared commitment to enhancing company value, encouraging employees to work towards the same financial outcomes that benefit shareholders.
• Discuss the potential risks and rewards associated with performance shares as a form of employee compensation.
  • Performance shares present both risks and rewards for employees. On one hand, if the company meets or exceeds its performance goals, employees can receive significant financial rewards in the form of company stock. However, if these goals are not met, there is a risk that employees will receive little or no compensation from these shares. This high-stakes nature can motivate employees to perform at their best but also creates uncertainty regarding their overall income.
• Evaluate how the structure of performance shares can impact employee behavior and company culture over time.
  • The structure of performance shares can greatly influence employee behavior and company culture by promoting a results-oriented mindset. When employees know their rewards depend on specific performance metrics, they may prioritize collaboration and innovation to achieve these goals. Over time, this focus can foster a competitive environment where success is recognized and rewarded, potentially leading to enhanced productivity and employee satisfaction. However, if not managed carefully, it could also result in short-term thinking, where individuals prioritize meeting immediate targets at the expense of long-term strategic planning.

Related terms

Equity Compensation: A form of non-cash compensation where employees receive shares of stock or stock options as part of their remuneration package.

Restricted Stock Units (RSUs): A type of compensation where employees are granted company stock that vests over time, typically contingent on continued employment.

Incentive Plan: A structured program designed to motivate and reward employees for achieving specific performance objectives, which may include cash bonuses or equity-based awards.