Using performance targets in your share plan
Private company owners who are giving up equity to employees will, not unreasonably, want to ensure that they are getting some return for their generosity.
With many discretionary schemes (such as Enterprise Management Incentives (EMI) or Company Share Option Plan (CSOP), it is possible to attach performance targets so that participants can only exercise their options to the extent that certain targets have been met. Performance targets can also be used even where an option only becomes exercisable if there is a corporate event such as a sale of the company (“exit only” options) – so that, for example, only a certain proportion of options can be exercised on an exit, depending on the achievement of pre-set performance targets.
When setting any target, the SMART acronym is always quoted – but this has so many permutations that it can be unhelpful.
For share plans, we might suggest a different acronym – LESS is MORE … here’s why:
L ong term - a share plan is not like an annual bonus – remember you’re taking the long view. If you sell the business for £50m in 5 years’ time, how much does it matter if department A fails to hit a specific profit target in Year 2?
E asy to communicate – your share scheme will only be successful if you can explain the exercise conditions easily to your staff – what they have to do, and how much will they get as a result.
S imple – because if the targets aren’t simple, you won’t be able to communicate them and your staff won’t know what they’re aiming for. Share options can sometimes be a tricky concept for employees without adding in complicated performance targets.
S uccess - what is going to make your company successful, as a whole? Focus your targets on the bigger picture.
M otivational – incomprehensible, complicated targets measured 10 years into the future … not motivational, just confusing and demoralising. Give everyone something they can work towards.
O bjective – a subjective performance target isn’t easily measurable which means it is almost useless as a target (and in the worst case scenario leaves your company wide open to an employment claim).
R etention – a key objective behind your share plan is to keep the best staff. Impossible performance targets aren’t going to get you there. Think about giving a little something for past performance, or without any specific performance targets attached.
E asy to understand – you might be able to communicate it easily, but is it easy for your employees to understand?
A complicated performance target can go beyond merely failing to motivate – in the worst case scenario it can actually demotivate your staff.
RM2 has 21 years’ experience helping companies design share plans, including appropriate performance measures. We advise on practical, commercial, sensible exercise and vesting conditions that work for you and your employees.
For more information call 020 8949 5522 or email firstname.lastname@example.org.