Restricted Stock: Performance Shares

Performance Shares: The Basics (Part 1)

Bruce Brumberg
A growing number of companies are making stock grants that base your profit on more than just your continued employment or an increase in stock price. As companies take a "portfolio approach" to stock compensation, you may be granted performance shares, which you receive only upon the achievement of specified goals. In Part 1 of this series, learn about the basics of performance share grants.

Performance Shares: Grant Structure, Expiration, And Job Events (Part 2)

Bruce Brumberg
To maximize the value of a performance share grant, you need to understand its structure more than you do with standard time-vested restricted stock or stock options. Also consider expiration and the impact of job termination.

Performance Shares: Taxation And M&A (Part 3)

Bruce Brumberg
With performance shares, your payoff depends on more than just your continued employment or an increase in the company's stock price: your company sets a goal that must be reached. After this goal has been met and you have received the shares, what are the tax consequences, both at that point and later when you sell them? Plus, what would happen if your company were acquired before the end of the cycle?

Performance Shares: Taxes & Communications

Bruce Brumberg
myStockOptions.com
This PowerPoint presentation (in PDF) explains both fundamentals and quirks in the taxation of performance share grants, including potential IRS penalties and fines when certain rules are not followed. It also gives recommendations on what to explain to employees about performance share plans so that they understand them. Premium Members may request the source PowerPoint to use at their companies or with clients.

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What is the difference between restricted stock and performance shares or units?

Restricted stock shares are issued up front at grant, but you do not own them outright and cannot sell or transfer the shares until the time-based restrictions lapse. With standard restricted stock units the situation is basically similar, while with performance shares your company sets goals that must be met, such as...

NEW! What would happen to my performance share grant if I were to lose my job, retire, become disabled, or die?

When you terminate for standard reasons before the end of the performance cycle, you usually lose all rights to receive the grant, even if the goal appears very obtainable. If you have overlapping or concurrent grants that are outstanding...

UPDATED! What do examples and surveys show about the effects mandatory expensing is having on my stock grants?

A summary of data in surveys from 10 major consulting and research firms shows that...

Can restricted stock and performance shares go underwater?

Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests (or, with restricted stock units, when shares are delivered). It does not matter if...

Is the original vesting schedule ever accelerated by reaching performance milestones or special goals?

Some companies let the standard time-based vesting schedule accelerate if...

UPDATED! What types of company goals are most commonly set for performance shares and units? What do surveys show about the performance metrics that companies use?

Stock-based performance plans have targets that, when reached by the end of the measurement period, trigger vesting or payout according to the structure of the plan. Data from varoius surveys show that the most common metrics are...

Does a grant of restricted stock or performance shares have an expiration date, as stock options do?

Not for standard time-vested restricted stock. These grants do not have a term, as stock options do. The vesting of restricted stock depends on...

NEW! How is my performance share grant taxed?

Performance shares do not result in any taxable income to you at grant. You do have ordinary income when the grant vests after specified targets are reached and shares (or cash) are then either delivered or paid out to you. Depending on the structure of the grant...

W-2 diagram! What will my W-2 show after the vesting of performance shares?

Performance shares result in ordinary income to you. This occurs when the grant vests after specified targets are reached and shares are either delivered or paid out to you. Depending on the structure of the grant, this may occur in the year after the end of the performance period...

Schedule D diagram! How do I report a sale of performance shares on my federal income-tax return?

You need to complete a Schedule D, Capital Gains and Losses, for the year of the sale of your stock and file it with your Form 1040 federal income-tax return. You do this even if you are only...

UPDATED! How common are stock options, restricted stock, and performance shares outside the US? Do surveys show trends?

Consulting firms have studied the use of stock compensation in both developed and emerging economies. Stock options remain popular, but interest is growing in restricted stock/RSUs and performance shares. Among surveyed countries...

How common are premium, indexed, and performance-based stock options?

Companies set the exercise price at some premium to the current market price as an additional...

UPDATED! Can my stock option grant be designed to vest only when certain performance targets are reached?

In these grants the exercise price is equal to the fair market price on the grant date, but the grant vests only when certain targets, such as...

NEW! What happens to my performance shares in an acquisition of my company?

For a change in control (e.g., a merger or acquisition), the performance period for measuring whether goal(s) are reached is cut short. Commonly, performance share plans...

I am a senior executive. When do I make my Form 4 filing for restricted stock, restricted stock units, and performance shares?

Within two business days of the grant, you file Form 4 electronically under the SEC's Section 16 rules. At vesting, depending on the withholding method...

Will my company be able to take a tax deduction for the value of my restricted stock, restricted stock units, performance shares, or stock options if my compensation already exceeds $1 million?

This depends on what triggers vesting. Section 162(m) of the tax code limits your company's deduction to $1 million unless a senior officer's compensation over this amount meets the performance-based exception. Stock grants are structured to meet this by...

With restricted stock units and performance shares, can I defer delivery of the shares at vesting?

Delaying the delivery of RSU shares (and thus ordinary income taxes) at vesting depends on whether your company has a provision for this in its stock plan. The deferral needs to be structured correctly, as otherwise it can lead to tax penalties. Deferral is not...

Does the accelerated vesting of my stock options, restricted stock, and/or performance shares in a change of control or termination have any tax impact on me, such as for ISOs and golden parachute payments?

With stock grants of normal size, you face no tax impact beyond the standard tax treatment. ISOs may be converted to NQSOs should any acceleration of vesting cause...

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