subject: Putting Performance Plans to Work for You [print this page] Putting Performance Plans to Work for You
Performance awards are unique for many reasons, but are based on one central, defining idea: They set out to compensate people based on performance criteria. While this concept is certainly appreciated during an era of public scrutiny over executive compensation, it also allows performance awards to offer benefits that other equity awards do not, including:
Rewarding people based on their merits, not just on favorable market conditions. Stock options and share awards cannot offer this same guarantee, as they facilitate occasions where executives make huge gains while stakeholders experience significant losses.
Allowing for simple calculations to determine the level of compensation received by an employee which can easily be set up to have a clear and fair quantitative basis (e.g. if an employee achieves 72% of their annual goals, they receive 72% of the grant maximum).
Aligning the interests of employees and shareholders (in terms of company-wide performance targets) by focusing attention on specific goals and driving high-achievement performance.
Performance awards have also become easier to report on: Under ASC Topic 718 (FAS123R) and IFRS2, they no longer require variable accounting, and all types of equity awards now result in an income statement expense.
What makes an award a "performance award"?
Any type of equity compensation becomes a performance award when there is a performance goal attached to it. Performance goals set out a specific target that must be met before the award will be received, and are uniquely designed to determine when/if/how much of the award will be paid to an employee once designated targets are achieved.
A bit of background on performance plans
Performance plans have been around in the U.S. since the 1970s, having emerged from a 14-year flat stock market period that ended in 1982. During this time, the executive compensation industry recognized that stock prices were down, but not necessarily because of poor executive performance. This realization centralized the need for performance awards in the U.S.
Variations of performance awards were widely adopted across Europe and the U.K. in the 90s. This adoption grew out the belief that just because a company was enjoying success, it didn't mean everyone within the company was performing well enough to be reaping compensation benefits. Therefore, performance plans were an attempt to reward people based on merit, not luck. As a result, there are many large U.K. companies today that use performance awards to complement other types of equity plans.
Want to learn more about performance awards and their unique design considerations? Download Solium's white paper on the topic.
