In Depth
Performance share units are equity awards contingent on the company meeting predetermined financial or operational targets over a multi-year measurement period, typically three years. Common performance metrics include total shareholder return relative to a peer group, earnings per share growth, return on invested capital, revenue growth, and free cash flow targets. At the end of the performance period, the number of shares that vest can range from 0% (if threshold performance is not met) to 200% or more of the target grant (if maximum performance is achieved). This leverage means PSUs can be worth significantly more, or less, than their original grant-date value. PSUs have become the preferred vehicle for aligning executive pay with company performance. According to proxy advisory firms like ISS and Glass Lewis, a majority of S&P 500 companies now use PSUs as a significant component of their long-term incentive programs. The use of relative total shareholder return (rTSR) as a performance metric is particularly common because it directly measures value creation for shareholders compared to peers. However, designing effective PSU programs requires careful selection of metrics, peer groups, and payout curves. Poorly designed programs can reward mediocre performance or fail to differentiate between good and poor management. Compensation committees typically disclose the specific metrics, targets, and payout formulas in the proxy statement's CD&A section.