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PERFORMANCE SHARES

Another type of restricted stock award is performance shares, although these awards are subject to the company’s success, such as its overall earnings or the profits of the specific division where the grantee executive works. In this situation, the final reward at the time the shares vest could be nothing or greater than the initial grant. A common range may be 0% to 200%.

Understanding Performance Shares

Performance shares are meant to link the interests of managers and executives to those of shareholders. Employee stock option plans (ESOPs) and performance shares have similar objectives in that they both give management an explicit incentive to concentrate their efforts on increasing shareholder value.

In contrast to standard stock-option programs, where employees receive stock options as part of their regular salary, in the case of performance shares, the manager receives company shares or stock options as payment for achieving goals. As a result, it is a type of performance-based remuneration given to workers who have delivered exceptionally well or who have reached or exceeded pre-established milestones or benchmarks.

How Performance Shares Are Issued

The allocation of performance shares frequently depends on how well the company performs in relation to particular metrics. For instance, the shares might only be distributed if the market value of the company’s stock reaches a specific level. Companies may also design performance share plans based on return on capital, total shareholder return, cash flow from operating activities, or a combination of many indicators of how well the company is performing over a predetermined time period.

If a business meets its strategic objectives, such as finishing a campaign or project by the deadline, enhancing the internal performance of a division, or obtaining regulatory approval for a new product, performance shares may also be issued. Performance shares may be subject to restrictions set by the corporation, and during some of those restrictions, the executive or management may be given voting rights on those shares even though they have not yet been released from the restrictions. Additionally, based on those shares, an executive or manager might be entitled to dividends, which would be paid out in accordance with the terms of the remuneration agreement.

Restrictions on Performance Shares

Along with overall performance, the quantity of performance shares awarded may also change. In such situations, it is important that the corporation not only achieves the objectives set forth, but also that the amount of shares granted to executives is contingent upon how well the company performs in relation to those indicators.

It can take different amounts of time to decide whether to grant performance shares. Outside of the key performance measures being used, market changes may also affect the performance shares’ actual worth. Before the recipient can take possession of the shares once they have been issued, there may be a necessary vesting time.

Tax Implications of a Performance Award

An employee who receives a performance reward is generally not subject to federal income tax at the time of the grant. Unless the plan allows the employee to delay receiving the cash or shares, the employee is instead taxed at the time of vested benefits. In these situations, the employer is required to make specific withholdings that could or might not cover the full amount of the employee’s tax due upon vesting or payment. Depending on the company’s plan regulations, payment of all additional taxes may be postponed until the employee actually receives the shares or cash equivalent on the payment date. The difference between the grant’s fair market value at the time of vesting and any grant fees, if any, is the amount of income that is taxable. According to the plan rules, the employee’s tax holding period may or may not start at the time of payment for grants that are made in the form of actual shares. The employee’s tax basis is the sum of the price paid for the stock plus the amount included as ordinary compensation income. Assuming the employee holds the shares as a capital asset, upon a later sale of the shares, the employee would report capital gain income or loss. Whether or not this capital gain would be short-term or long-term depends on the amount of time that has passed between the start of the holding period at vesting and the date of the subsequent sale. For information on the effects of income taxes on you, speak with a tax professional.

How to Pay Taxes on Performance Award

You may have two or more ways to fulfill your tax withholding obligation, depending on the plan’s rules:

Net Shares: The appropriate number of shares are withheld to satisfy the tax withholding obligation whether you choose to net or if your firm mandates it. Less the number of shares withheld for tax purposes, you keep the number of shares to be paid.

Sell Shares: You will need to provide Fidelity a one-time authorization for Fidelity to sell a portion of your vesting shares to satisfy your tax withholding obligation if your firm permits you to choose this option or if they mandate it. The authorization is valid for all subsequent sell share elections once it has been accepted. To accept your Trade Direction Instructions, click the link that says “View & Accept Agreements/Instructions” on the plan summary page. Your remaining shares and any cash from the sale of shares will be equal to the number of shares that vested less the number of shares sold to satisfy your tax withholding obligation.

Pay in Cash: If your employer permits it or mandates it, you must have the required sum of money in your account when the tax is withheld. At the time of the tax withholding, the money will be deducted from your account and sent to your company for reporting and remittance to the relevant regulatory bodies. You keep all of the shares that will be paid. Please be aware that you must have money in your Fidelity Account at the time of the tax withholding in order to prevent having your account restricted if you opt to fulfill your withholding requirement with cash from that account. Cash payments made in lieu of estimated tax withholding do not fill your account.

Calculation of Tax Withholding

The total fair market value of your grants at the time of the tax withholding (minus the price you paid for the shares, if any) is multiplied by the tax withholding rate provided by your firm. This is how tax withholding is determined.