A Performance Rights Plan is a common employee equity plan used by companies to incentivise employees to reach specified performance targets and increase retention of high-performing staff. Key features of this employee share plan are described below.
Generally, a Performance Rights Plan is made available by companies to all employees globally.
Under the Plan:
- Employees are granted a certain number of performance rights, determined by the company.
- These performance rights usually have conditions attached, including:
- Performance targets relating to an employee’s role.
- Meeting a company share price target.
- An event occurring such as a takeover or sale
- Once the vesting date is reached and performance conditions are met, the rights convert into shares.
- If performance conditions are not met, the rights will lapse.
All employee equity plans have certain obligations and conditions under the plan rules. With a Performance Rights Plan, these are commonly:
- Vesting – employees must remain employed and meet their performance conditions at the vesting date to allow for the rights to convert into shares.
- Dividends and voting privileges – dividend and voting privileges do not apply to the performance rights.
- Leavers – For a good leaver (such as terminating employment due to redundancy), rights may be exercised into shares as at their termination date or held until the vesting date, then exercised. For bad leavers (such as an employee resigning or exiting because of misconduct or breach of employment contract), rights are forfeited.
It is important to obtain professional tax advice for any employee equity plan. Broadly, tax points to note under a Performance Rights Plan include:
- It is a requirement for all companies to issue annual employee share scheme tax statements for Australian employees.
- After being issued with an employee share scheme tax statement, employees must meet their personal tax requirements with respect to equity.
- Withholding tax is to be withheld by the company on half of the employee when rights convert into shares for non-Australian tax domiciled employees.
- Company tax deductions may apply under the plan, including the use of an Employee Share Scheme Trust to claim a tax deduction for the value of exercised rights.
BoardRoom has a dedicated Employee Equity Plan team that has extensive experience in manging Performance Rights Plans for companies of all sizes. If you would like to learn more about how the Performance Rights Plan or other employee share plans works and how we can help, please feel free to contact us.