October 25, 2019
Journal of Applied Corporate Finance – Are Performance Shares Shareholder Friendly?
by Marc Hodak, Farient Advisors
Since the early 2000s, executive compensation has experienced a secular shift toward performance shares—equity awards whose vesting is based on performance as opposed to time or service. In the past, for example, an executive might have been granted mostly restricted stock units (RSUs) that would vest over a three-year period; they simply had to stick around to get all the shares. Today, an executive is more likely to be granted over half their awards in performance share units (PSUs) that vest at the end of
three years; in such cases, the number of shares that actually vest can be more or less than the nominal grant, depending on how well the company performs during that period. Ten years ago, less than half of S&P 500 firms awarded PSUs. Today over 80% of them do, and PSUs have become an increasingly larger percentage of the long-term incentive (LTI) mix within those companies.