A comprehensive overview of grant strcutures, administrative challenges, accounting and tax issues associated with equity compensation in the form of Performance Awards.

1. Performance Awards: Grant Structures and
Administrative Challenges
Denise Vitale
VP Product Development

2. Equity Compensation Management
Plan design
Company senior executives
Compensation department/consultants
Legal council
Finance/Accounting
Board of Directors or Compensation Committee
The natural result of a well-designed plan is that each company will have a
unique plan that suits the goals and objectives unique to that company.
Once terms and conditions are outlined in a plan document and grant agreement,
the company is contractually obligated to adhere to them.

3. Equity Compensation Management
Administration of stock plans
Compliance (Taxation, securities, accounting, corporate law, data
privacy, labor law, etc.)
Transaction processing and record-keeping
Reconciliation and reporting
Communications
Documentation
System maintenance
The natural result of well-designed stock plan administration software is that the
needs of the stock plan administrator are met with a minimal amount of
manual intervention.

4. Performance Awards Defined
Umbrella terminology that covers a number of award
types and vesting/earning scenarios.
With these stock / unit grants, there is some aspect, such as
vesting schedules or amount of award shares that may be
acquired, that is conditioned upon meeting personal,
company or stock performance criteria.
Most common for restricted share awards or units
May be applied to options, SARs, phantom awards
May be paid out in cash or shares (We will focus on share-
payout awards)

5. Performance Awards Defined
There are three categories of vesting conditions
that may be incorporated into the award
Service conditions (continued employment, time-based
vesting)
Market conditions (tied to stock price)
Performance conditions (EPS, ROI, sales revenues, etc. -
May be company, divisional or individual measurements)
Awards may incorporate multiple conditions
It is common to have service conditions applied in addition
to performance and/or market conditions
The type of vesting condition applied to the award
will impact the accounting treatment of the award
Terminology check: Performance conditions are a type of vesting condition
applied to performance awards.

6. Performance Award Characteristics
Components that differentiate performance awards
from non-performance awards
Number of shares: Earned shares may be adjusted based on
performance goals attained
Performance metrics: Specified goals drive the ultimate
payout
Single and multiple metrics may be defined for an award
Performance periods/cycles: Defined measurement
period(s) during which goals will be measured for possible
attainment (earning shares)
A metric may be measured for a specific target as of a specific date:
Is earning per share at least $25 as of the end of the last reporting
period of the fiscal year?
A metric may be measured for a range of performance over a specified
period of time: Has earning per share been at least $25 for 3 out of
the past 4 quarters?
A metric may be measured until it occurs. Once earnings per share
reaches $25…

7. Performance Award Vesting
Vesting schedule:
Specific dates attached to specific award shares that define when the
award shares are available to the participant.
A System may have a vesting schedule to cover just the time-based
service vesting or it may combine time/service and performance earning
Vesting from a tax standpoint:
The point when there is no longer a substantial risk of forfeiture
Vesting and Earning from a performance award
standpoint:
The point when vesting and earning conditions have been met:
Performance hurdles (performance and/or market conditions) (event-
based vesting)
Service conditions (time-based vesting)
– Typically, the service conditions are met after the performance cycle
is completed
There may be two schedules required to track these two types of
conditions
Performance cycle schedule and time-based vesting schedule

8. Performance Award Vesting
How vesting might look for a performance award:
Vesting may occur all at once (cliff) or in tranches
(graded/incremental)
Vesting may occur as of specific dates with attainment of
specified goals impacting the number of shares earned
Vesting may occur only upon the attainment of specified
goals
Vesting may be accelerated upon the attainment of certain
goals, but payout ultimately occurring on a set date
whether goals are attained or not
Time-based vesting may coincide with performance
periods/cycles or occur over a period of time after
performance earning has been measured

9. Software Application Considerations
What accounting/taxation/reporting record-keeping
software doesn’t have to do:
It is not up to the software to determine if performance goals
have been met
What accounting/taxation/reporting record-keeping
software should do:
Calculate earned shares based on achievement of
performance goals
Comply with applicable regulations
Hold all applicable grant/vesting/cancellation information
with meaningful labels
Accurate calculations
Accurate reporting
Proper plan share-pool tracking
Meaningful communications

10. Performance Award Models
Acceleration: Vesting accelerates upon meeting specified
goals
Incremental Earning (Multiplier): Grant of a target
number of shares is issued. Participant may earn fewer or
more than the target number of shares
Banking: Awarded shares are earned based on a specified
performance cycle and “banked” while a time-based
vesting schedule continues over an additional specified
period
Fixed Value: The number of shares issued is based on a
specified dollar value derived from the fair market value
of the awarded shares as of one or several dates

11. Grant Lifecycle
Grant
Measure success in meeting performance / market
goals. Determine shares earned.
Reflect incremental shares earned above target
Or
Earned shares = target shares
Or
Cancel shares if earned shares below target
Apply time-based vesting
Apply Release / Payout

12. Accounting Overview
Measurement Date: When the value of a grant is
measured to determine the AMOUNT of the potential
compensation expense
Attribution: Recognition of the expense (WHEN
/HOW the expense is recognized)
Attribution of the compensation expense generally
occurs over the service period for an award
Service Period: Generally the time-based vesting
period for an award
Time-vesting based on continued service: Recognize
expense over vesting period

13. Accounting for Performance Awards
Measurement Date: Grant Date
Attribution:
Service-based vesting accelerated upon reaching performance goals:
recognize expense over period up to when goals are expected to be
reached
Period adjustments may be necessary if expectation of when grants will vest
changes
Performance-contingent vesting (non-market conditions): Only
recognize the expense for the portion of the grant expected to vest
and recognize expense over period up to when goals are expected to
be reached/vesting is expected to occur
Reevaluate vesting expectations each reporting period and recognize expense
based on current estimates of amount to vest and timing to vest
Only recognize expense for award shares that actually earned
Vesting Contingent upon Reaching Market Condition Goals:
Fair value of grant adjusted based on expected likelihood of attaining the market
conditions specified
Expense recognized for full value of award even if market conditions are not met
– Forfeiture reversal of expense allowed if service conditions not met and
unvested shares are cancelled upon employee’s termination)

14. Administrative Tasks Supporting Financial Reporting
Quarterly: Properly adjust the expected vest factor
for the grants to ensure the expense properly reflects
the expected earning (only for non-market-based
performance measurements)
Ensure the “Performance Cancelled” shares are
addressed properly in the expense calculations
Performance Cancellations are not “forfeitures” for
accounting purposes and shouldn’t impact the forfeiture rate
Market-based performance measures: expense is not reversed
even if performance goal isn’t met
If market-based performance award shares are forfeited upon
termination, expense is reversed (service requirement has not been met)

15. Taxation of Performance Awards
Tax timing and withholding requirements driven by the award type:
Restricted share awards and restricted stock units: Ordinary income
earned upon vesting (once there is no longer a substantial risk of
forfeiture)
Ordinary taxable income = FMV at vest – purchase price x shares vesting
Withholding required
Company compensation expense tax deduction = ordinary income
recognized by employee and reported on W2
83(b) elections
Participant may make an 83(b) election for restricted share awards
Participant may NOT make an 83(b) election for restricted stock units awards
Restricted stock units: deferral elections may apply
Non-qualified deferred compensation taxation addressed under IRC §409A

16. Administrative Challenges
Reporting and user interface views typically need to
show target shares as “granted” shares
Companies vary in what they want to see where
Target
Minimum
Maximum
Earned
Incremental shares earned
Performance shares cancelled
Pool of shares available for issuance needs to consider
maximum shares that may be earned
Companies may want a separate number reflecting target
shares granted

17. Administrative Challenges
Cancellation categories
Termination (service conditions not met)
Vested
Unvested
Proration of unearned shares
Performance conditions not met: What date is applied to the
cancellation record?
Expiration
Other Vested & Unvested
Need to reflect different categories of cancellations and
the type of vesting conditions that were applied
Service and Performance conditions: recognized expense
reversed
Market conditions: recognized expense not reversed
Plan Reserve (available for issuance): Plan dictates
cancellation types that are added back to the pool

18. Administrative Challenges
Reconciling Items:
Transactions put into the system (activity date) in
the current reporting period with a transaction
date in the previous (closed) reporting period
Beginning balance for the current period reports do
not match the ending balances from the previous
period reports
Companies want to show target shares in
Options Outstanding and other non-financial
reports. When incremental shares are earned,
this creates reconciling items.

19. Administrative Challenges
Performance Awards under a Multiplier Model:
Target number of shares is designated with an earning
potential ranging from zero to a specified amount
above 100%.
Each grant has a target number of shares granted, and
a minimum and maximum earning potential.
In this model, there are three possible outcomes for
total shares earned, as follows:
Target with earning at 100%
“Target + Incremental” with earning at greater than 100%
“Target – Cancelled” with earning at less than 100%

20. Administrative Challenges
Communications, Calculations and Reporting
(Including expense and earnings disclosure) need to be
considered to determine how to reflect target,
maximum possible, incremental and actual earned
shares.
Expense Calculations
EPS: Common Equivalents
Outstanding Balance
“Granted”
Plan Share Reserve
Participant Communications

21. Administrative Challenges
Each software package will have its strengths
and limitations that will influence how you will
administer performance awards.
Each grant type will have its own challenges:
Restricted Stock Awards with shares issued at Grant
and released at vesting
Restricted Stock Units with earned shares issued at
vesting
Stock Options/SARs where earning occurs at vesting
but exercise is at a later date