Performance Share Plans (or Long-Term Incentive Plans as they are also known) are used in their own right or as an alternative to Share Option Plans. In the UK a Performance Share Plan (“PSP”) or Long-term Incentive Plan (“LTIP”) is usually applied to an arrangement under which one or more senior executives is awarded a number of shares in their employer company or the parent company.
Performance Share Plans (“PSP”) have taken the form of either:
a) contingent share awards – that is, a deferred and conditional award of a given number of shares which may vest (i.e. to which the executive becomes unconditionally entitled) after, typically, 3 years to the extent that performance targets, relating to the corporate performance of the company, are met; or
b) nil-cost option awards – that is, the grant of an option to acquire a given maximum number of shares at no, or only nominal, cost payable on exercise, the option becoming exercisable (to the extent that performance targets are met) after 3 years and remaining exercisable at the decision of the optionholder for a period of up to ten years from grant. By contrast with a contingent share award, the decision as to when to exercise the option once it has vested will typically be that of the optionholder.
In some cases, executives have been awarded shares at the outset of the performance period, but on terms that such shares will be forfeited to the extent that performance targets are not met.
Unlike share option plans, PSPs will usually retain value even if the company’s share price falls (subject to the attainment of performance conditions)
Upon vesting any gain would usually be subject to Income Tax and National Insurance Contributions.
If awards are to be made to executives or senior management, they will usually be subject to performance conditions, and for larger listed companies, institutional investors will expect performance conditions to be attached to the award. The performance conditions should “align the interests of executive directors with that of shareholders and link reward to performance over the longer term” and the company should give careful consideration to the performance conditions it attaches to any awards to ensure they reflect the company’s key objectives.
There are a range of performance targets that can be used, ranging from Earnings Per Share and Total Shareholder Return measures to targets linked to individual or departmental targets (i.e. sales targets or cost savings). The type of Performance conditions any company will adopt, will vary industry to industry, and will largely depend on the key objectives of the company concerned.