Understanding Performance Based Restricted Stock: A Legal Overview

Q: How does performance based restricted stock differ from regular stock options?

Performance based restricted stock requires meeting specific performance metrics before the shares vest, while stock options typically allow purchase at a set price regardless of performance.

Q: Are there tax implications for receiving performance based restricted stock?

Yes, the tax treatment can vary based on when the stock vests and the specific terms set by the company.

Definition & Meaning

Performance based restricted stock refers to shares granted to executives that are contingent upon achieving specific performance goals, either internal (like revenue targets) or external (such as stock price increases). This type of compensation aligns the interests of executives with those of the company and its shareholders, incentivizing performance that drives company growth.

Unlike standard restricted stock, which is typically awarded without performance conditions and vests solely based on tenure, performance based restricted stock requires measurable achievements before the shares can be fully owned and sold. This structure enhances accountability and motivates executives to focus on the company's success.

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Legal Use & context

Performance based restricted stock is commonly used in corporate governance and executive compensation practices. It is relevant in areas such as employment law and corporate law, particularly concerning executive contracts and shareholder agreements. Companies often utilize performance based restricted stock to attract and retain top talent while ensuring that executive actions are aligned with shareholder interests.

Users can manage related legal documents, such as employment agreements or stock option plans, using templates available from US Legal Forms, which are drafted by qualified attorneys.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A technology company grants its CEO performance based restricted stock that vests only if the company achieves a 20 percent increase in revenue over the next three years. If the goal is not met, the CEO does not receive the shares.

Example 2: A pharmaceutical firm offers its executives performance based restricted stock tied to the successful launch of a new drug. If the drug meets sales targets within the first year, the stock vests; otherwise, it is forfeited. (hypothetical example)

Common misunderstandings

Misunderstanding: Performance based restricted stock is the same as regular restricted stock.
Clarification: Unlike regular restricted stock, which vests based solely on time served, performance based restricted stock requires meeting specific performance metrics.
Misunderstanding: All executives receive performance based restricted stock.
Clarification: This type of compensation is typically reserved for higher-level executives and is not universally applied across all employee levels.

What to do if this term applies to you

If you are an executive considering performance based restricted stock as part of your compensation package, review the performance criteria and vesting schedule carefully. It's essential to understand how these terms align with your personal and professional goals.

For companies looking to implement this compensation structure, consider consulting with a legal professional to draft appropriate agreements. Users can also explore US Legal Forms for templates that can simplify the process.

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Quick facts

Attribute	Details
Type of compensation	Equity-based
Performance criteria	Internal or external goals
Vesting period	Defined by the company
Tax implications	Varies based on vesting