This is a modification to the stock options. At the core
this strategy deals with rewarding stock options and
cash to its executives. A typical example of how it
works: A CEO receives a contingent grant of up to 5,000
performance shares at the beginning of the year. The
total shareholder return relative to an industry peer
group dictates how many shares the executive actually
gets. If the shareholder return value relative to the
industry peer group is below then the executive would
not get any shares. It the return is well above that of
its industry peers then the executive gets his share.
The higher the return the more shares the executive
actually earns. Performance shares are usually paid out
in a combination of company stock and cash, however
there might be a requirement with holding the stock for
a period of time after it is awarded. The advantage of
this approach is that by requiring the company to
outperform its peers, the plan is supposed to reduce
payoffs tied only to rising stock prices. The catch here
is that if the stock price is flat over a period of time
and the company does better than its peers, the
executives would get pay out but not shared by its
investors. Since the stock market is not part of the
equation the volatile stock market is not going to
dictate the executive pay. I think that the method of
tying bonus to the return of investment is going to gain
support. Since the market became more volatile, pay
experts have said stock grants may be used more widely
More and more institutional investors are becoming
critical of stock grants, as they are an outright gift
of shares to the executives. To summarize I think that
the bonus and performance shares are a good alternative
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