The Other Kind of Performance Award

There is a lot of buzz in the equity world these days about "performance awards," a term of art, not law, that usually means that either an equity award (typically restricted stock or a stock option) is vested, or sometimes granted, only if certain performance targets are met. But there is another kind of performance award that may work well for closely held companies that want to tie employees to some kind of mid- to long-term performance, but not stock value per se. This kind of award would be based on the company meeting a certain critical number or numbers (revenue, profits, new customers, or whatever else drives business success) over some period of years. If the company meets those targets, then some pool of cash is set aside to award to eligible employees based on a predetermined formula.

For instance, a company might grant Mary 100 performance units in 2011. The unit will be worth 10% of a pool of funds that will be set aside in 2014 based if the company's revenue grows by at least 20% over that time. If it does, then 5% of the growth in excess of the target will go into the performance award pool, and Mary would get 10% of it. Awards based on future targets could be granted every year or any other time period.

The thinking behind this concept is that employees may find it easier to focus on a number like this than the more abstract concept of share value. The payoff is more certain than many stock plans in closely held companies where plan rules often require a liquidity event to sell shares (albeit these plans could be written to provide for internal liquidity). Some owners may also just not be comfortable with sharing more equity or may have constraints on what they can offer based on investor requirements. Making these awards based on longer-term goals, meanwhile, encourages people to stick around and focus on whatever the company thinks drives the business.