Legal Definitions - performance shares

Performance shares are a type of compensation given to employees, typically executives, in the form of company stock. Unlike regular stock options or restricted stock units, performance shares are only awarded and become fully owned by the employee if the company, or a specific division, achieves certain pre-defined performance goals or objectives.

These objectives are usually set over a specific period, often several years, and can be financial, operational, or strategic in nature. The purpose is to incentivize key personnel to drive the company towards significant achievements that benefit shareholders.

Here are some examples to illustrate how performance shares work:

• Example 1: Financial Growth Target

  The CEO of a technology startup is granted 100,000 performance shares. The terms state that these shares will only vest (become fully owned) if the company achieves a cumulative revenue growth of 50% over the next three fiscal years. If the company successfully hits this aggressive financial target, the CEO receives the shares, aligning their personal reward with the company's significant financial success. If the target is missed, the shares are forfeited.

• Example 2: Product Development Milestone

  A pharmaceutical company awards its Head of Research and Development 50,000 performance shares. The vesting of these shares is contingent upon the successful completion of Phase 3 clinical trials for a new drug candidate and its subsequent approval by regulatory bodies within a five-year timeframe. This incentivizes the executive to prioritize and efficiently manage the critical stages of drug development, directly linking their compensation to a major operational achievement for the company.

• Example 3: Environmental, Social, and Governance (ESG) Objective

  The Chief Sustainability Officer of a large manufacturing corporation is offered 25,000 performance shares. These shares will vest if the company reduces its overall carbon emissions by 20% and achieves a 15% improvement in workplace safety metrics across all its facilities within a four-year period. This structure motivates the officer to implement effective sustainability and safety initiatives, demonstrating how performance shares can be tied to broader strategic and ethical goals beyond just financial metrics.