Legal Definitions - performance bonus

A performance plan is a type of executive compensation arrangement designed to incentivize senior leaders by linking a portion of their pay directly to the achievement of specific company-wide financial or operational goals. Under such a plan, executives receive additional compensation, often in the form of bonuses, stock options, or restricted stock units, when the company meets or exceeds predetermined performance targets. These targets commonly relate to metrics such as revenue growth, profit margins, market share, or stock price appreciation. The primary aim is to align the interests of executives with those of the company's shareholders and overall business success.

• Example 1: Revenue Growth Target
  The Chief Executive Officer (CEO) of a rapidly expanding software company is enrolled in a performance plan that stipulates a substantial annual bonus if the company achieves a 25% year-over-year increase in its global recurring revenue. If the company falls short of this target, the bonus is reduced or not paid.

  This illustrates a performance plan because the CEO's additional compensation (the annual bonus) is directly contingent upon the company meeting a specific, measurable growth metric (25% increase in recurring revenue), thereby incentivizing the CEO to drive that growth.

• Example 2: Profitability and Efficiency
  A major automotive manufacturer implements a performance plan for its Chief Operating Officer (COO) where a significant portion of their annual incentive compensation is tied to improving the company's overall operational efficiency, measured by a 15% reduction in production costs and a 10% increase in net profit margin across all divisions within a fiscal year.

  Here, the COO's bonus is linked to the company's financial health and operational efficiency, specifically its profitability and cost management. This demonstrates how executive pay is tied to achieving predefined company performance targets that contribute to the bottom line.

• Example 3: Shareholder Value Creation
  A group of top executives at a publicly traded biotechnology firm participates in a long-term performance plan. Under this plan, they are granted restricted stock units that will only vest (become fully owned) if the company's stock price outperforms a specific industry index by at least 20% over a three-year period, ensuring sustained growth in shareholder value.

  This example showcases a performance plan where executive compensation (restricted stock units) is directly tied to the company's market performance and the creation of value for shareholders. It incentivizes leaders to make strategic decisions that drive long-term stock appreciation and investor returns.