The Advisors' Blog

Despite their prevalence — actually near ubiquity at large-cap companies these days — the research on whether PSUs actually accomplish their goal is mixed. A recent report, The Debate on Performance Shares—Who Has It Right?, by Charles Tharp and Ani Huang of the CHRO Association lists these key research findings:

– Pay Governance found companies with PSUs show robust alignment of realizable pay (Compensation Actually Paid) with TSR, but not Summary Compensation Table pay. This was the only study to find an advantage with PSUs.
– Farient Advisors’ Marc Hodak showed that PSU-heavy companies paid their CEOs more but delivered weaker shareholder returns.
– Norges Bank found that among their US holdings, firms using PSUs underperformed sector peers without PSUs.
– Virginia Tech Professor Felipe Cabezon found companies that change their pay structure to become more similar to other firms (often, by adopting PSUs) underperform in shareholder returns and firm valuation compared to those with tailored designs.
– WTW reported that “enduring high-performance firms” relied more on stock options, had longer vesting, and fewer metrics—tailoring incentives instead of adopting the most common practice.

Not surprisingly, institutional investors hold varying views on what mix of performance-based or time-based equity is best. In addition to recent proxy advisor survey results, a recent Pay Governance survey found that 37% of large investors surveyed expressed a preference for PSUs, 34% both PSUs and long-vesting time-based RSUs and 24% long-vesting time-based RSUs.

In terms of what the conflicting data and views mean for executive compensation programs right now, the report suggests:

The takeaway isn’t to abandon PSUs overnight but to ensure they are a part of a thoughtful, strategy-driven mix rather than a reflexive adoption of prevailing practice.
Ask: Does our LTI mix reinforce our strategy, or just proxy advisor references?
Test: Would a more tailored blend—longer vesting, some options, greater ownership— better align with our performance and talent goals?
Remember: Homogeneity reduces criticism of incentive design, but it may also reduce shareholder value.

– Meredith Ervine