Performance Share Plans or LTIPs
Performance Shares are sometimes known simply as LTIPs or Conditional Share awards (or RSUs in the USA). They have become more popular than Share Options in recent years, partly because of the IFRS 2 changes to accounting for share-based payments in 2005.
Under a typical Performance Share award, employees are granted a right to acquire a specified number of shares three or five years later without any payment. The proportion of shares which vests will depend on the Company’s performance over this period. The performance measures are often based on total shareholder return (TSR) or earning per share (EPS) growth; but many companies nowadays are using other measures based on their particular strategic objectives. The shares are usually subject to income tax and NICs at their value on the vesting date.
Some companies use Nil-Cost or Nominal-Cost Options instead. These can give employees the choice of when to exercise the options and trigger the tax charge.
It is now common for payment of part of annual bonuses for senior executives to be deferred and invested in the company’s shares during the deferral period. Companies may choose to defer only the net of tax bonus. However, it can be more tax-effective for the gross amount to be reinvested.
In some cases, executives are given a choice about the proportion of the bonus which is deferred. They are then often awarded matching shares to compensate them for the deferral.
Restricted Shares and Forfeitable Shares
Share awards can also take the form of Restricted Shares, where the employee becomes the owner of the shares immediately but the shares may be forfeitable in certain circumstances – eg leaving employment or failing to meet performance conditions. If the restrictions will last for no more than five years, an employee is taxed on the value of the shares when the restrictions are lifted. Alternatively, the employee may elect to be taxed on their unrestricted value when the shares are first acquired (ignoring the risk of forfeiture), in which case any further increase in value should be subject to capital gains tax.