Schedule 2 share incentive plan (SIP): Types of award: Free shares: Performance allowances - General requirements
Performance allowances are awards of free shares which are made only if a performance target is met or where the number or value of shares awarded depends on performance (paragraph 34(4)). The same terms rule does not apply to awards of shares linked to performance, provided the performance measures meet the requirements of the legislation.
The SIP code sets out two ways in which a performance measure may work:
A Schedule 2 SIP will typically provide for both methods and the company can choose which will be used for a particular award of free shares.
A Schedule 2 SIP which provides for performance allowances must:
- make such provision for all qualifying employees in relation to a particular award (paragraph 38),
- set performance targets for performance units comprising one or more employees (paragraph 39(2)),
- use performance measures which are:
- based on business results or other objective criteria, and
- fair and objective measures of the performance of the units to which they apply (paragraph 39(3)), and
- require the company to notify employees of the performance targets and measures.
Some of these requirements are considered in greater detail below.
The performance criteria can vary between business units and can apply to the performance of:
- the whole company,
- sections, departments or units, and
- individual employees.
This enables companies to design performance allowances that meet their business needs, and that are directly relevant to groups of individuals (paragraph 42). An employee cannot be a member of more than one performance unit for the purpose of a particular award of free shares (paragraph 39(4)). If employees move between performance units during the period over which performance is measured, it is acceptable to determine their awards on a pro-rata basis according to the time spent in each unit.
The Schedule 2 SIP must require the company to notify, as soon as practicable:
- each employee who has accepted an invitation to participate in an award of the performance targets and measures to be used in his or her case, and
- all qualifying employees of constituent companies of the performance targets and measures, in general terms, to be used to determine awards. The company can exclude from this notice any information that it reasonably considers would prejudice commercial confidentiality.
These requirements mean that, in practice, it is also necessary for the company to assign individuals to performance units before issuing notifications.