5 Key Guidelines When Designing a Performance Award Plan

Close-shot of a tablet computer displaying financial data, threeBy Don Gillotti. Performance awards are one of the most challenging equity types to manage. As with any complicated process, the beginning stages of planning are crucial to future success. If you plan well, chances are you will execute well. Allocate time and resources to design an effective performance award plan in order to eliminate future headaches. Here are a few key elements to set yourself up for success.

1. Invite everyone to the table – don’t underestimate the resources you will need. Performance award management spans departments from accounting to tax to administration. Involve your CFO, Compensation Committee, Director of Accounting and payroll tax administrator – to name a few. Create an open line of communication and make sure everyone is on the same page.

2. Don’t leave performance measures open to interpretation – make sure the metric is objectively measurable. For the performance plan to be successful, the goals must be communicated clearly and understood by all parties. It is vital to use clear numbers, percentages and dates to measure the completion of a performance goal. Clarity is crucial.

3. Choose the right performance metrics – make sure they align with the long-term goals of the company. Also, verify that the goal is within the employees’ range of responsibility. Elect performance or market measures that will drive executive behavior towards your company’s strategic objective. You can find more detailed information on performance metrics in our article Choosing the Right Metrics for Performance-based Compensation. A successful performance plan motivates executives towards common goal with consideration for their individual contributions.

4. Make sure the terms of the award are communicated clearly – performance awards are complicated. When employees don’t understand the facts, the effectiveness of the award is compromised. Don’t make the plan more complicated than it has to be.

5. Consider the accounting implications – accounting should not be an afterthought. It is crucial that you have the proper processes in place in order to avoid any future complications. Document the various considerations for performance condition and market condition accounting. Our Equity Compensation in a Say-On-Pay World white paper will provide you with key accounting considerations for performance-based compensation.

Recent legislation mandates the transparency of executive compensation plans, and performance awards demonstrate to shareholders that aligning pay with performance is important to your company. Designing a performance award plan can seem daunting, but proper planning will set you off in the right direction. Reference these 5 points to create a strong foundation and build an effective performance plan.

Don Gillotti