Performance Stock Unit Programs
PSUs have surged in popularity since the accounting rules changed in the early 2000s, requiring companies to expense stock options. As shareholders and proxy advisors called for greater alignment between pay and performance, the focus on PSUs increased. PSUs allow companies to create customized metrics tied to their strategic goals. The customary PSU three-year performance period prioritizes long-term value creation over short-term results.
However, PSUs present unique challenges, especially in times of significant volatility. In fairly recent years, unanticipated macro events, such as the housing and financial crises of 2007, the collapse of the automotive industry in 2008, and the COVID-19 pandemic, rendered companies' three-year performance forecasts ineffectual. Currently, the impacts of the Trump administration's agenda on the market seem almost impossible to predict. Many companies are:
Reconsidering whether PSUs remain an appropriate vehicle (and in some cases electing to instead grant additional restricted stock with an elongated vesting schedule).
Reimagining their PSU programs by:
incorporating a balanced scorecard of financial, operational, and market metrics;
introducing a formulaic adjuster that modifies targets up or down when pre-determined macroeconomic conditions fall outside a certain range;
establishing a flat portion of the leverage curve where if performance is achieved within a target range, 100% payout is earned;
extending the leverage curve (for example, by allowing payouts to be earned at 25% to 35% of target); or
exploring whether it is appropriate to shift from absolute goals, which present forecasting challenges, to relative goals, which eliminate the forecasting challenges but create potential challenges related to selecting the appropriate comparator group.
Jessica Cherry of Practical Law asked Aalap Shah of Pearl Meyer and Tristan Brown of Simpson Thacher to discuss the prevalence of PSUs, traditional PSU design elements, new PSU program structures that are better insulated against macro volatility, and the primary tax and legal issues related to PSUs.
Prevalence of PSUs
Aalap Shah
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