The Advisors' Blog

We’ve talked a lot about the shifting views of proxy advisors and institutional investors toward programs that consist primarily of time-based awards, provided vesting or retention requirements ensure these time-based awards have a sufficiently long-term horizon. This FW Cook insight summarizes the proxy advisor policy shifts concisely:

ISS will no longer automatically criticize companies granting less than 50% in PSUs, provided the time-based equity component is sufficiently “long-term,” defined as meeting one of the following thresholds:

• • 5-year ratable or cliff vesting;
  • 4-year vesting plus a 1-year post-vest holding requirement; or
  • 3-year vesting plus a 2-year post-vest holding requirement.

Glass Lewis will also no longer automatically criticize companies granting less than 50% of LTI in PSUs. However, they will evaluate the overall LTI program holistically. Any reduction in PSUs should be offset by a reduction in target pay opportunity (to account for the greater certainty of time-vested awards), longer vesting periods, and sufficient rationale in the proxy statement.

The insight discusses moves being considered in light of these shifting views — specifically, compensation committees reconsidering where their LTI program falls on the spectrum of performance focus to ownership focus. They call out these examples of changes being considered:

Rebalancing the LTI mix: Reducing PSUs to 30–40% of LTI while allocating the remainder to long-term time-vested equity (e.g., RSUs with a 5-year ratable vest). This preserves a performance component while shifting the center of gravity toward long-term ownership and retention.

Repositioning stock options as “performance-based”: Options inherently carry performance leverage; they only deliver value if the stock price appreciates. But, they are not perceived as “performance-based” by proxy advisors. Attaching a 5-year vest/hold strengthens retention while satisfying proxy advisor expectations. Read FW Cook’s piece Could Stock Options Make a Comeback?

The “1-3-5 PSU”: Maintaining PSUs, but compressing the performance period from three years to one year to mitigate financial goal-setting challenges. Earned shares do not vest until the third anniversary of grant with a subsequent two-year post-vest holding period (i.e., 1-year performance period, 3-year vest, 5-year hold). This design can be further enhanced by applying a relative TSR metric or modifier over the 3-year vesting period.

But they also warn – consistent with Liz’s note that PSUs remain a “safe bet” – that “a premature shift away from PSUs could trigger a low Say-on-Pay vote, regardless of proxy advisor flexibility.” So, they suggest that 2026 be treated as a “diagnosis year” – meaning that compensation committees should focus on evaluating the current program and explore creative alternatives where appropriate.

– Meredith Ervine