Despite the likelihood of a change in the corporate tax deduction for performance-based grants (see our FAQ on tax reform in Congress), the growing popularity of performance shares and PSUs is expected to continue, especially in grants to executives. For those of you who design, grant, or receive performance-based equity awards, we have observed some interesting recent developments.
Survey Reveals Trends In Performance Goals
The theme of optimal performance measures, featured in various sessions at the recent annual conference of the National Association of Stock Plan Professionals, has become a prominent issue for companies and shareholders.
According to Equilar's survey Equity Compensation Trends 2017, the most common metrics of performance awards at the "Equilar 500" companies in 2016 were relative TSR (52.4%), ROC/ROIC (34.9%), EPS (30%), revenue (17.8%), and cash flow (14%). Metrics vary by industry, as Equilar, the leading provider of executive compensation data, explained when reporting the survey results in its blog. For example, 88.5% of the surveyed utility companies based performance award payouts on relative TSR, while just 33.3% of the surveyed companies in the services sector did so.
As Equilar mentions, Institutional Shareholder Services (ISS) recently changed its methodology to include metrics other than TSR in its pay-for-performance analysis, and that may prompt meaningful changes in plan design (see the related ISS press release). An FAQ at myStockOptions has more survey data on performance share grants.
Apple Payout Of Performance Share Units
In September, RSUs granted by Apple in 2014 paid out at the end of their cycle after the associated performance conditions were met. Eight Apple executives each received a payout of 125,494 shares. This was reported by several sources. The footnotes in the related Form 4 filings (e.g. the filing by Apple's general counsel) provide details on the grant, including its payout scale, and an example of Section 16 reporting:
- The amount of stock each received was based on Apple's total shareholder return (TSR) relative to other companies in the S&P 500 from September 28, 2014, through September 30, 2017.
- Apple's TSR during that period was 65.53%, which gave it a ranking of 92nd out of the 451 companies in the S&P 500.
- Apple placed in the 80th percentile, resulting in the 125,494 vested RSUs for each executive. Had its ranking reached the 85th percentile, the executives would have seen a slightly larger reward: 200% of the target 68,576 RSUs would have vested.
- Apple withheld 62,929 shares for taxes.
For info on how to report performance share grants on Form 4, see the related FAQ at myStockOptions.
Lawsuit Over Performance Shares In Job Termination
A job termination in which stock compensation is forfeited creates a situation ripe for litigation. What happens when someone with a performance share grant is fired before the end of the performance period? In Suzuki v. Abiomed Inc., a federal district court in Massachusetts ruled that a covenant of good faith and fair dealing applies to potentially protect someone with unvested performance-based grants. The fired executive contended that his termination occurred after he had performed much of what was required to achieve the business objectives tied to his grant's customized vesting schedule. He claimed that the company simply did not want to pay him the compensation, particularly since its stock price had substantially increased after the grant date. The company contended that the employment agreement gave it the right to terminate employment at any time and that the performance conditions did not occur until 15 months after termination.
The court found that even for at-will employees the covenant applies to prevent unjust enrichment by the company for not paying compensation that is "fairly earned and legitimately expected." At a minimum, the ruling means that a termination made in bad faith cannot cancel the payout when the compensation "is connected to work already performed." The case is discussed by a commentary from the law firm Sherin & Lodgen. For more on issues to watch for involving stock plans and job termination, see the related section at myStockOptions.