Do Performance Share Units Work?

Aubrey E. Bout and Blaine Martin of Pay Governance evaluate the effectiveness of a decade of performance stock units on shareholder value.

PSU plan payouts in aggregate were aligned with company total shareholder return (TSR): plans paying out above target showed significantly higher TSR than plans paying out below target during the same period.

There is no one-size-fits-all approach to pay-for-performance: PSU plans using both operating metrics and relative TSR metrics show strong alignment with TSR over the contemporaneous period.

We found that PSU payouts for plans implemented in and after the first year of say-on-pay (SOP) had higher payouts than plans before SOP, but this trend is likely influenced by broad stock market trends independent of SOP.

PSU plans based entirely on operating metrics had median plan payouts at or below plans that included Relative TSR metrics in 7 of 10 years reviewed. This finding suggests that Compensation Committees closely scrutinize goal setting when using operating metrics in PSU plans, which rebuts arguments that companies commonly set easy operating financial goals to get above-target payouts.

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