When it comes to stock grants, know what you own
At first, “knowing what you own” may seem too obvious to mention when considering stock-based compensation.
That’s until you look a little deeper.
In grants of restricted stock, shares are issued up front at grant, but you do not own them outright until the restrictions lapse at vesting.
That means you cannot sell or transfer the shares until then. On the other hand, while standard restricted stock units (RSUs) are similar, the shares are not issued into your actual possession until the vesting occurs.
Length of service and receipt of shares
Under both restricted stock and RSUs, vesting usually happens after a specified length of employment (for the purposes of this post, the phrase “restricted stock” includes RSUs unless RSUs are specified as well).
Performance shares are not issued up front and are usually part of a long-term performance or incentive plan (LTIP).
You earn the payout in shares by meeting targets that are either absolute or relative to the performance of your company’s peers. When in the form of performance share units, each unit has a designated dollar value, with payment in shares, cash, or a combination of both.
Performance plans may have other design features that are structured to meet company strategic plans, such as a measurement period (e.g., a three-year cycle).
Even after the shares are paid out for meeting performance goals, the shares can then include time-vesting rules that require continued employment. Common performance targets are based on the stock market or on other company goals, such as total shareholder return (TSR), earnings per share (EPS), sales, return on assets, return on equity, and levels of customer satisfaction.
Example: Instead of granting you 2,000 shares of restricted stock that vest 25% a year on the anniversary of the date when your employment started, your company grants you 2,000 performance shares that will result in 2,000 shares if the earnings per share (EPS) of your company grow by 10% per year or cumulatively by 30% after three years.
Restricted stock can be performance shares, too
Not every company clearly distinguishes between true performance shares and restricted stock that is contingent on performance. Restricted stock and RSUs can have vesting features that are similar to targets for paying out performance shares.
With performance-vested or performance-contingent restricted stockthe shares are issued up front, giving you voting rights and dividends (but not with RSUs). The shares are held in escrow until the reaching of the target triggers vesting.