The NASPP Blog

The popularity of performance-based equity compensation is growing. If your company is adopting a new performance plan, these are the top 5 things you’ll need to know in order to administer and communicate it to participants.

1. Performance criteria

Companies can spend a lot of time hammering out the best performance criteria to motivate employees as there are seemingly endless possibilities. The stock plan management team needs to have a very clear understanding of the performance measures being tracked for the grant (e.g., target EPS, milestones, or relative TSR) and how performance will impact the grant (e.g., will it determine the payout date, payout amount, or strike price).

These unique parameters determine how performance-based grants should be valued and how their expense is amortized. For example, if the performance goals are considered market-based, then the valuation takes the likelihood of vesting based on those conditions into consideration. Expense for awards that are not paid out due to not achieving the market condition is not reversed. You can find more on the valuation and amortization of performance-based grants in the article “Accounting for Performance and Market Awards” from Equity Methods.

2. Performance period(s)

With performance-based grants, the vesting period and the performance period may not be the same (in fact, it’s recommended that the vesting date be far enough after the end of the performance period to allow for approval of performance goal achievement). Some grants even have multiple performance periods within one grant. If the performance and vesting schedules differ, it is important that each is well-documented and tracked. It may not be possible to track separate periods within the same database, so detailed documentation is essential.

3. Performance attainment

It will also need to be very clear when performance measurement will take place and who will be responsible for determining the degree to which performance targets have been achieved. In order to qualify as “performance based” grants under 162(m), the compensation committee will need to certify that the performance targets have been met. To facilitate a smooth certification process, the other groups and individuals involved must be ready to report to the compensation committee as cohesively and promptly as possible. It may be just one group or person who can verify the performance target(s); in which case the company should develop a process to insure that that group or individual is prepared to evaluate performance at the end of the performance period. On the other hand, the evaluation may require multiple groups; in which case there should be a process in place to coordinate.

4. Terminations (and other details)

There are many important grant parameters that are not necessarily unique to performance-based grants. For example, the inclusion of dividends or dividend equivalents, the details of change of control provisions, and how terminations will impact the grants. I highlight terminations because there are additional considerations for performance grants, and because they are the most likely scenario to consider.

The trickiest termination consideration is what to do about grants where one or more performance periods have been met prior to termination; particularly for termination due to death, disability, or retirement.

5. Grant input and tracking

After all the details of a performance plan are in place and understood by everyone involved, there is still the challenge of how to get as much of the specifics of plan into the stock plan administration software. Many stock plan administration databases have some degree of tracking and reporting capabilities for performance-based grants. However, due to the amount of variation among existing performance plans, it is likely that there will be some degree of “outside the box” thinking around how to input each company’s performance plan.

If you are getting ready to input performance grants into your stock plan administration software, be sure to meet with your software provider to determine what can be entered in the database and what must be tracked outside the database or otherwise customized. You’ll need to be sure that you’ve found the best balance between the way the grant reflects in the participant interface, on expensing reports, and even how it impacts plan reserves.

Planning

Of course, the best way to have a manageable performance plan is to have the stock plan management team be an integral part of the planning process! The best way for the stock plan management team to get invited to the planning table is to be knowledgeable regarding performance plans prior to the adoption of a new plan.

Whether you’ve just been asked to manage a performance plan or your company is exploring the possibility, we have a fantastic program designed to get you prepared. Offered for the first time this year as a one-day intensive program preceding the 18th Annual NASPP Conference, “Practical Guide to Performance-Based Awards” will give you the substantive knowledge necessary to implement or administer this unique and emerging form of equity compensation.

Early bird rates for the pre-Conference sessions end on April 15th. If you are planning to attend both the Conference and the “Practical Guide to Performance-Based Awards”, you get a double-discount if you register before the early-bird rates for both end on April 15th. Register today!