Sep 1 2020

Performance-based Options Grants

I had a bunch of interesting comments on my recent post about company options programs – many very constructive. One of the things a number of people have asked was what I think is the right approach to performance-based options grants. I realized I referenced this in my original post but didn’t cover it in any detail.

Performance grants are important and provide an opportunity to describe a nuance that I didn’t do a very good job of outlining in my original article. For performance grants, I believe the right methodology is for the board and the management team to decide on a pool of options that is available in any given year for merit-based grants. I think it’s important that the company concentrate those grants on the absolute best performers in their business. I’m not a fan of a large percentage of employees getting performance-based grants nor am I a fan of grants being formulaic based on comp or similar factors (i.e.,not really based on performance). I believe that performance grants should be concentrated on the absolute top end of the business (the top 5%… maybe top 10% of the company). The point is to reward your absolute best performers, not to have your performance grant program work as a company-wide option top-up every year.  From my perspective, diluting their effect by giving them too far down the employee line is counterproductive.

The nuance that I didn’t describe in my last post is that it’s important to realize that you can deviate from the formula, up or down, based on your belief of the importance or the performance of the options recipient. In theory, if you’re doing a good job of performance grants, your absolute best performers will end up with more options than your average employee in the same role. Using the refresh formula I outlined in my previous post will provide them with incremental options in their refresh as well, as it should. That said, it’s important to take a look at the refresh amounts and do a sanity check to make sure that they map. I would not recommend varying widely from this but, as Chris Moody pushed on in one of the comments to that post, being a slave to a formula is rarely a good idea in anything you do in your business.

Ok – enough about options for now. Hopefully these posts have been interesting and helpful.

Also published on Medium.