About Performance Award Plans

A performance award is typically a grant of company shares or units in which the recipient’s rights in the shares or units are contingent on the achievement of pre-established performance goals. Details of performance awards vary vastly based on company-defined rules. For specific details regarding your performance awards, please refer to your plan document or grant agreement.

How do performance award plans work?

A performance award is typically a grant of company shares or units in which the recipient’s rights in the shares or units are contingent on the achievement of pre-established performance goals, and restricted until the end of a set performance period. At the end of the performance period, the company will determine if the performance goals originally outlined when the performance award was granted have been achieved. If these goals have been met or exceeded, the company may adjust the awarded number of shares accordingly. Performance awards may also involve an additional vesting period at the end of the performance period. Once these vesting requirements have been met, an employee owns the shares or cash outright and may treat them as they would any other share of stock or cash in their account.

Income Tax Treatment

Under normal federal income tax rules, an employee receiving a performance award is not taxed at the time of the grant. Instead, the employee is taxed at vesting, unless the plan allows for the employee to defer receipt of the cash or shares. In these circumstances, the employer has certain withholding obligations which may or may not cover the entire tax liability for the employee at vesting or payment. Payment of all other taxes can be deferred until the payment date, when the employee actually takes receipt of the shares or cash equivalent (depending on the company’s plan rules). The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting, minus the amount paid for the grant, if any.

For grants that pay in actual shares, the employee’s tax holding period begins at the time of payment (which may or may not coincide with vesting depending on the plan rules), and the employee’s tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income. Upon a later sale of the shares, assuming the employee holds the shares as a capital asset, the employee would recognize capital gain income or loss; whether such capital gain would be short- or long-term depends on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Consult your tax adviser regarding the income tax consequences to you.