280G and Performance Awards: Full Value, Time-Based Value, or Somewhere in Between?

Performance awards can be some of the most complicated equity compensation to analyze in a change-in-control (“CIC”) transaction.

A performance award may be worth millions of dollars on the transaction date, but that does not necessarily mean the entire amount is treated the same way for purposes of Section 280G.

The critical question is not simply what the award is worth. It is:

What conditions must be satisfied for the executive to receive the award, and what conditions remain outstanding when the CIC occurs?

That distinction can determine whether the full value of a performance award is treated as contingent on the transaction, or whether the analysis may be more similar to that of a time-based award, with only the value attributable to acceleration treated as contingent.

For companies and deal teams, understanding that distinction early can make a meaningful difference in the 280G calculation and in the decisions that follow.

The Three Performance Award Scenarios Under 280G

For 280G purposes, performance awards can generally be thought of in three broad categories:

1. Performance is still outstanding at the CIC
   The transaction causes an otherwise unmet performance condition to be satisfied or eliminated. The full accelerated amount may be treated as contingent on the transaction.
2. Performance has already been satisfied and certified before the CIC
   The performance condition is no longer outstanding. If only a service requirement remains, the award may be analyzed under the rules applicable to service-based vesting and acceleration.
3. Performance is measured or determined in connection with the transaction
   The transaction itself plays a role in determining the executive’s entitlement. This requires a fact-specific analysis and can result in the full amount being treated as transaction-contingent.

The distinction between these scenarios is easy to overlook, and potentially significant.

Why the Vesting Condition Matters for 280G

Section 280G generally treats payment as contingent on a change in ownership or control if the payment would not, in fact, have been made had the change not occurred. The regulations provide special rules for determining how much of certain payments is treated as contingent when the CIC accelerates an otherwise vested payment or causes a service-based payment to vest.

For an unvested payment, the favorable treatment is available when, absent the CIC, vesting depends only on continued performance of services for a specified period.

The regulations then draw an important line:

If vesting depends on an event other than services, such as attainment of a performance goal, and that event has not occurred before the CIC, the special service-based rules do not apply.

In that case, the full amount of the accelerated payment is treated as contingent on the CIC. That is the starting point for understanding performance awards.

Scenario 1: Performance Has Not Yet Been Achieved

Consider an executive with a $1 million performance award.

The award:

• has a three-year performance period;
• requires achievement of an EBITDA target;
• also requires continued employment through the end of the performance period; and
• has 18 months remaining when the company enters into a transaction.

The transaction agreement provides that the award will vest at target upon closing.

At the time of the transaction, the EBITDA target has not yet been achieved.

The transaction is therefore doing more than eliminating the executive’s remaining service obligation.

It is effectively eliminating or satisfying an unmet performance condition.

Under the 280G regulations, the special rules applicable to payments that are contingent only on continued service do not apply when vesting depends on a performance goal that has not been achieved before the CIC. The full amount of the accelerated payment is generally treated as contingent on the change.

Scenario 2: Performance Has Been Achieved and Certified

Now consider a very different fact pattern.

The executive has the same $1 million performance award.

But this time:

• the performance period has ended;
• the applicable performance metrics have been determined;
• the compensation committee has certified achievement at 150% of target; and
• the award remains subject only to continued employment for an additional six months.

The transaction occurs during that six-month period and accelerates the remaining service requirement, a fundamentally different 280G fact pattern.

The executive’s entitlement to the performance award has already been established.

The transaction is not causing the executive to achieve the performance goal.

Instead, the transaction is eliminating the remaining service requirement, which can move the analysis into the framework applicable to a payment contingent only on continued services.

In other words, although the award originated as a performance award, the performance condition is no longer an outstanding condition to the executive’s entitlement.

Why This Distinction Matters for the 280G Calculation

The 280G regulations provide special treatment for certain payments that become vested as a result of a CIC when, absent the change, vesting depends only on continued service for a specified period and the payment is attributable at least in part to services performed before the payment becomes vested.

For those payments, the amount treated as contingent on the change can be limited to the amount attributable to the acceleration, including an amount reflecting the lapse of the remaining service obligation.

So, in this scenario, the analysis may look much more like a time-based acceleration than a performance-based acceleration.

Certification Can Be the Turning Point for 280G

This makes the timing of performance certification particularly important.

Imagine a performance period that ends December 31. The compensation committee is scheduled to certify performance in February. The company signs a transaction agreement in January and closes in February.

The company may know that the performance metrics were achieved based on its internal calculations, but that does not necessarily answer the 280G question.

The analysis should examine:

• When did the performance period actually end?
• When was performance determined?
• Who had authority to certify performance?
• When did that certification occur?
• Was the certification discretionary?
• Could the committee adjust the result?
• Did any performance conditions remain outstanding?
• What does the award agreement say happens between the end of the performance period and certification?

The distinction between performance being mathematically achieved and the award becoming vested or otherwise no longer subject to a performance contingency can matter.

For this reason, performance certification should not be treated as an administrative footnote in a 280G analysis.

It can be an important fact.

Performance Period Ending Doesn’t Mean Automatically Certified

One of the easiest mistakes is to assume that the end of the performance period automatically means the performance condition has been satisfied for 280G purposes.

It may not.

Suppose an executive has a PSU with a December 31 performance period. The company is acquired on January 15, but the compensation committee will not certify performance until February 15.

Even though the performance measurement period has ended, the award may still be subject to a formal determination or certification process.

The plan and award documents should therefore be reviewed carefully before concluding that the performance condition was satisfied independently of the transaction.

The relevant question is not merely: “Did the performance period end?” It is: “Was the executive’s right to the payment substantially vested, or was the performance condition otherwise no longer an outstanding condition to payment, before the CIC?”

The second framing is far more useful for a 280G analysis.

Scenario 3: Performance Is Determined at or Because of the Transaction

The third scenario falls somewhere between the first two.

Consider an award with a performance period that has not yet ended. The transaction agreement provides that performance will be measured through the closing date and the executive will receive a payout based on actual performance through closing.

For example:

• Target award: $1 million
• Performance period: January 1, 2025 through December 31, 2027
• Transaction closes June 30, 2027
• Performance is measured through June 30
• Award is paid based on actual performance through closing

Here, the transaction has an important role in determining the executive’s payment.

The analysis should not simply treat the award as a normal time-based award.

The deal team needs to determine whether the performance condition was actually satisfied independently of the transaction or whether the transaction caused the award to become payable.

The same is true when the transaction agreement provides that the award will be paid at:

• target;
• actual performance through closing;
• the greater of target or actual performance;
• maximum performance; or
• another negotiated level.

The mechanics matter.

Side-by-Side Example: Same Award Value, Different 280G Outcome

Consider two executives, each with a $1.2 million performance award.

Executive A: Unmet Performance Condition

The executive has a three-year PSU. The performance period has 18 months remaining. The performance goal has not been achieved. The transaction causes the award to vest at target.

Potential 280G treatment: The full $1.2 million may be treated as contingent on the CIC because the transaction caused an otherwise unmet performance condition to be satisfied or eliminated.

Executive B: Performance Certified

The executive has the same $1.2 million PSU. The performance period has ended. The compensation committee has certified performance at 120% of target. The award remains subject only to six months of continued service. The transaction accelerates the remaining service requirement.

Potential 280G treatment: The performance condition is no longer outstanding. The analysis may instead focus on the acceleration of the remaining service requirement, potentially resulting in a substantially smaller amount being treated as contingent.

Same award type, same dollar value, but a different 280G result, which is why simply pulling ‘PSU value’ from an equity report is not enough to complete a 280G analysis.

What Should Deal Teams Look For in a 280G Analysis?

When reviewing performance awards for 280G, the following questions should be answered early in the transaction:

1. What are the vesting conditions?
   Is the award subject to: continued service, performance, both service and performance, or another condition?
   
2. Has performance been achieved?
   If yes, when was it achieved?
   
3. Has performance been certified?
   If yes: by whom, when, and at what level?
   
4. What remains outstanding at closing?
   Is there still: a service requirement, a performance requirement, committee discretion, a certification requirement, or another condition?
   
5. What does the transaction do?
   Does it: accelerate vesting, accelerate payment, eliminate service requirements, eliminate performance requirements, determine performance, deem performance achieved, or modify the payout formula?
   
6. At what level is the award paid?
   Is it based on: actual performance, target, maximum, a transaction-specific formula, or another amount?
   
7. What do the governing documents say?
   The analysis should consider the: equity plan, award agreement, employment agreement, compensation committee resolutions, transaction agreement, and any other documents governing the award.

Why This Matters Before Closing

The difference between these scenarios can be significant.

If a company has several executives with large performance awards, the 280G outcome may depend not only on the value of those awards but also on where each award sits in its performance cycle at the time of the transaction.

A company that is approaching the end of a performance period may therefore have an important question to address: Has performance been satisfied and appropriately certified before the CIC, or will the transaction determine the executive’s entitlement?

That question can affect the amount of compensation treated as contingent, the potential excess parachute payment, and ultimately the executive’s exposure to the 20% excise tax.

It can also affect transaction planning. The earlier the award mechanics are identified, the more opportunity there may be to understand the consequences and evaluate available mitigation strategies.

The Bottom Line on 280G and Performance Awards

Performance awards should not be treated as a single category for 280G purposes.

A performance award with an unmet performance condition at closing can produce a very different result from a performance award for which performance has already been satisfied and certified.

The first may result in the full accelerated value being treated as contingent on the CIC. The second may be analyzed more like a time-based award if the performance condition is no longer outstanding and the transaction merely accelerates a remaining service requirement.

The distinction comes down to a deceptively simple question: At the time of the CIC, what conditions still had to be satisfied for the executive to receive the award?

That is why 280G analysis should go beyond an equity schedule showing grant date, target value, and transaction-date value.

The award’s label tells you what it is called. The vesting mechanics tell you how it may be treated under 280G.

For deal teams, compensation committees, and advisors, identifying those mechanics early can mean fewer surprises, better mitigation decisions, and a more accurate view of the transaction’s true 280G exposure.

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