5. Performance Shares and Performance Units
i. Performance Shares and Performance Unit awards may be granted in the amounts and subject to the terms and conditions determined by the company. Performance Shares and Performance Units are, respectively, similar to shares of Restricted Stock and RSUs except that certain individual, financial or other company-related goals and targets must be met in order for the Performance Shares and Units to become non-forfeitable. The company should set performance goals which, depending on the extent to which they are met during the performance periods established by the company, will determine the number and/or value of Performance Shares/Units that will be paid/distributed to the individuals. These goals can include, among many others:
1. Attaining certain earnings levels during specified periods of time.
2. Attaining certain amounts of growth in the value of the company’s stock during specified periods. PLEASE NOTE: This goal is quite popular because, if the growth targets are carefully determined, dilution caused by the vesting of the restricted stock will not reduce the value of the owner’s interest in the company.
3. The successful completion of certain projects (e.g., an acquisition of a business, launching a new product, consummating the sale of the company for a specified price, etc.).
ii. The individuals generally receive payment of the value of Performance Shares or Performance Units earned in cash and/or shares of the company’s stock which have an aggregate fair market value equal to the value of the earned Performance Shares/Units after the end of the applicable performance period, in any combination as the company determines. The shares may be granted subject to any restrictions deemed appropriate by the company. Prior to the beginning of each performance period, most plans allow individuals to elect to defer receipt of payout on terms that the company may deem appropriate. Subject to the provisions of an applicable plan award, the individuals may be entitled to have dividends declared with respect to Performance Shares earned in connection with Performance Share/Unit grants that are earned but not yet distributed held in their performance accounts, subject to the same restrictions as are applicable to dividends earned with respect to Restricted Stock, as described above.
iii. As with RSUs, because Performance Units may constitute non-qualified deferred compensation described under Section 409A of the Code, certain design restrictions may apply.
b. Federal Income Tax Implications:
i. Impact on the Individual:
1. An individual who receives Performance Shares or Performance Units will not recognize any income for federal income tax purposes on the date of the grant of the award. He or she will recognize ordinary income for federal income tax purposes at the time of the receipt of the cash and/or stock in an amount equal to the sum of (i) the amount of cash received, plus (ii) the excess, if any, of the fair market value of the stock on the date received over the individual’s cost of the stock, if any.
2. If an individual disposes his or her shares of the company’s stock received under an award in a taxable transaction, the individual will recognize capital gain or loss in an amount equal to the difference between his or her basis (generally, the amount included as ordinary income pursuant to the award and the amount, if any, paid for the stock) in the shares sold and the total amount realized upon the disposition. Any capital gain or loss will be long‑term so long as the shares of the company's stock were held for more than one year from the date the shares were distributed to the individual.
ii. Impact on the Company:
1. At the time the individual recognizes ordinary income upon the receipt of cash or stock underlying Performance Shares or Performance Units, the company generally will be entitled to a federal income tax deduction in the amount of the ordinary income so recognized.