A performance share is a share of stock that is awarded to managers and executives of a business in the event that specific criteria related to the company’s performance is achieved. In many instances the awarding of performance shares is based on a wide set of factors that include not only the general performance of the business within a specified period of time, but also the contributions that the manager makes toward the realization of those benchmarks. From this perspective, a performance share strategy functions as an incentive to be effective in the workplace, and thus increase the earnings per share that is realized by all shareholders in the company.
It is not unusual for a performance share program to be part of the overall compensation program for executives and upper level managers. When this is the case, the company will often identify specific criteria that the manager must meet in order to receive shares. For example, a national sales manager may receive shares based on the total sales effort of his or her team resulting in reaching goals for revenue generation over the course of a calendar year. Managers of production-based departments may receive shares if they are able to keep the operational costs for their departments under a certain level, while still successfully accomplishing their assigned tasks.
One of the chief benefits of a performance share program is that it provides incentives to improve the financial stability of the business. Since employees who own shares of stock have a vested interest in doing all they can to increase the value of those shares, the theory is they are much more likely to achieve the goals required to earn more shares. As a result, the company’s bottom line improves, which in turn makes the stock more attractive to prospective investors and yields greater dividends to current investors.
Depending on governmental regulations that apply to the issuance of shares of stock within a given jurisdiction, the company may require that any shares disbursed through a performance share program remain in the possession of the recipient until he or she is no longer associated with the business. Most plans do provide the issuer of the shares with the option of buying back those shares, or converting the shares into a different class of stock, if specific circumstances make it necessary to take that action in order to keep the company in operation. For example, a business may decide to convert the shares into a different class as a means of thwarting a hostile takeover.