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Restricted Stock vs Performance Shares: What's the Difference?

When it comes to employee compensation, there are a variety of options that companies can choose from. Two of the most popular options are restricted stock and performance shares. So, what's the difference between the two?

What is Restricted Stock?

Restricted stock is a type of stock that is issued to an employee with certain conditions attached. Typically, the employee must remain with the company for a certain period of time before the stock vest. Once the stock vests, the employee will have full ownership of the shares and can sell them on the open market.

What are Performance Shares?

Performance shares are a type of stock that is awarded to an employee based on the company's performance. For example, a company may award performance shares to employees if the company meets certain financial goals. The number of performance shares an employee receives will depend on the company's overall performance.

What's the Difference Between Restricted Stock and Performance Shares?

The main difference between restricted stock and performance shares is that restricted stock is typically awarded to employees with the condition that they remain with the company for a certain period of time, while performance shares are awarded to employees based on the company's performance.

Advantages of Restricted Stock

There are a few advantages of restricted stock for both employees and employers. For employees, restricted stock can provide a sense of job security since they are typically required to stay with the company for a certain period of time before the stock vests. Additionally, restricted stock can be a good way to build wealth over time since the employee will have full ownership of the shares once they vest.

For employers, restricted stock can be a good way to retain key employees. Additionally, restricted stock can align the interests of employees with the long-term success of the company.

Advantages of Performance Shares

There are also a few advantages of performance shares for both employees and employers. For employees, performance shares can provide an incentive to work hard and help the company achieve its goals. Additionally, performance shares can be a good way to build wealth if the company performs well.

For employers, performance shares can be a good way to motivate and reward employees. Additionally, performance shares can align the interests of employees with the success of the company.

Disadvantages of Restricted Stock

There are a few disadvantages of restricted stock for both employees and employers. For employees, restricted stock can tie them to a company even if they are unhappy with their job. Additionally, restricted stock can be a risk if the company's stock price falls before it vests.

For employers, restricted stock can be a costly way to compensate employees. Additionally, restricted stock can create a sense of entitlement among employees.

Disadvantages of Performance Shares

There are also a few disadvantages of performance shares for both employees and employers. For employees, performance shares can be a risk if the company's stock price falls before they vest. Additionally, performance shares can create a sense of entitlement among employees.

For employers, performance shares can be a costly way to compensate employees. Additionally, performance shares can incentivize employees to take risks that may not be in the best interests of the company.

Which is Better?

There is no clear answer as to which is better, restricted stock or performance shares. The best option for a company will depend on its specific needs and goals.

Restricted Stock

Restricted stock can be a good option for companies that want to retain key employees. Additionally, restricted stock can align the interests of employees with the long-term success of the company. However, restricted stock can be a costly way to compensate employees and can create a sense of entitlement among employees.

Performance Shares

Performance shares can be a good option for companies that want to motivate and reward employees. Additionally, performance shares can align the interests of employees with the success of the company. However, performance shares can be a costly way to compensate employees and can incentivize employees to take risks that may not be in the best interests of the company.

Conclusion

There is no clear answer as to which is better, restricted stock or performance shares. The best option for a company will depend on its specific needs and goals.

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