Can awards be made subject to performance criteria, vesting schedules and forfeiture?
US equity awards are universally subject to performance criteria, vesting schedules and forfeiture provisions.
US public companies typically grant a portion of equity as time-based RSUs with the remainder (particularly for senior executives) as performance-based stock units or “PSUs.” PSUs vest over time, but performance thresholds such as those based upon relative total shareholder return (“TSR”) must also be reached for a pay out to be made.
Vesting of awards at private companies is usually time-based, but some private companies now require an exit event such as a sale or initial public offering for an equity award to vest. Private equity-backed companies typically require an exit event for participant liquidity with a substantial portion of equity subject to attainment of pre-established multiple of invested capital (“MOIC”) and/or internal rate return (“IRR”) thresholds for vesting.
Share rights and shares are typically subject to forfeiture in the US upon termination of employment prior to satisfaction of time-based or performance-based vesting conditions. A participant’s rights to shares that do not vest because a time-based or performance-based condition is not satisfied will lapse.
In addition, awards are often subject to forfeiture for violation of restrictive covenants or if the participant’s employment is terminated by the employer for certain bad acts or omissions referred as a “for cause” termination. Forfeiture provisions are governed by state law and the provisions of the plan, grant agreements as well as employment agreements and separate non-disclosure/non-compete agreements.
The scope of employer remedies for violating restrictive covenants varies significantly on a state-by-state basis. For example, in some jurisdictions, prohibitions on the solicitation of clients and employees and non-competition provisions are only enforceable when the company is being sold and the participant is selling shares.
Equity rights can also be made subject to clawback if the awards paid were based upon financial results that had to be materially restated by the company.
There is nothing in Mexican law that may limit the possibility of a performance evaluation as a condition to participate or receive a benefit under an incentive plan. This may allow the employer or the company sponsoring the plan to make a subjective decision, but it is always advisable having support for such decision (i.e. performance assessments). Vesting schedule and forfeiture are also common terms in an incentive plan in Mexico, which are valid, provided they are not contrary to the general principle of “employees’ acquired rights”. This is, an employee may forfeit a grant or benefit according to the terms of the incentive plan, for failing to comply with a specific requirement (i.e. exercising a right within a certain period), but cancelling an already vested right without further support in the corresponding incentive plan, may be challenged before a Mexican labour court.
Typically awards are made subject to performance criteria as this helps measure the success of the business and the individual's own contribution to the respective success.
Also, subjecting awards to vesting schedules is almost always used for practical reasons, mainly for securing the employee fidelity / retention element, but also for allowing sufficient time for actual calculation of business performance indicators relevant for the incentive plan awards.
With respect to forfeiture, employers typically document incentive plans through internal regulations, internal policies / plans or other documents issued by the employer alone/ unilaterally (without requiring employee consent). This is intended for securing their unilateral character and therefore to showcase the employer's flexibility in unilaterally amending or even terminating the plans. Certain incentive plans however require employee consent, such as the relevant agreements executed in relation to share options. However, in these cases, as anticipated above, it is generally recommended that this is granted by a different entity than the employer to keep it completely separate from the employment relationship and from the individual employment agreement executed between the employee and the employer. This is meant to clarify that the relevant documents for implementing this compensation are civil / commercial agreements, outside the scope of the employment relationship (even if granted in consideration of the individual's capacity of employee of the employer). Nevertheless, case-by-case analysis is always recommmeded.
Yes. See question 2 and 4.
Yes, however, if granted on a regular basis, awards could be deemed to be a worker’s permanent right, in accordance with legislation. Therefore, it is important to understand the local legal system to know the potential consequences of granting and eliminating incentives, especially when they are cash-based.