The NASPP Blog

With the influence of Say-On-Pay and heightened shareholder scrutiny, the use of performance-based equity has become a popular tool for companies to reward/incent executives and employees.  Designing, administering and accounting for these awards can be dramatically different than traditional time-based awards.  Here are five things you need to consider to effectively launch and administer a performance awards plan (even if you’ve already launched a performance plan, you still want to make sure these areas are well addressed):

• What type and size of awards will you grant?  An option award is typically sized much differently than a restricted stock award.  Currently, the most common performance award type is restricted stock units.  Or maybe your company would consider a combination of several types of awards?
• What type of metrics will you use to measure performance? Financial or strategic goals, market based measures, or some combination?  You’ll need to consider what type of performance you’re trying to motivate, what the market looks like for your company and perhaps what competitors are doing as well.
• Determination of achievement – who will certify that the achievement has been met, the Board or a committee?  The “vesting” date arrives – now what?  You’ll need to track how the performance measures up with the goals and present all the data to the person(s) responsible for making a final determination. Who is going to keep track of the performance metrics so that prompt attention is given when a goal or objective is achieved?
• Accounting – Depending on the type of award and the metrics associated with earning the award, the valuation and amortization of the expense can pose some tricky challenges. You’ll want to seek input from any internal and external accounting partners during the plan design phase to ensure the nuances of the plan don’t trigger any unanticipated accounting ramifications.
• Communication to participants—if you thought communicating equity awards to employees was difficult—introduce a performance element!  Clear, concise information to participants is critical – the awards aren’t an incentive if the employee doesn’t understand them! We’ve seen companies do everything from the standard emails and printed materials, to allowing participant access to a website that tracks performance metrics and shows the present value of the performance award.

If you’re sweating profusely because your boss just told you the company is considering a performance plan – you’re in luck.  The NASPP has developed a brand new online course, Performance Award Essentials.  This course will provide a “nuts and bolts” study of performance awards, giving you the tools and understanding you’ll need to account for, administer and report on these challenging new awards. A special thanks to our own Kathleen Cleary, NASPP Education Director, for providing the content for today’s blog.

-Jennifer