Farient on PSUs: “May Not Be Optimal”
Regular readers of this update will know that the debate around the efficacy of performance-based pay has picked up steam in the past months. Last week we featured a spirited defense of PSUs by Pay Governance’s Ira Kay; this week Farient presented new research drawing the opposite conclusion.
What happened: Farient’s Marc Hodak published a paper in 2019 called “Are Performance Shares Shareholder Friendly?” The paper took a critical eye to PSUs, claiming that they were tied to higher pay and lower TSR, and that they lead to short-termism.
For example, Hodak cited a previous study finding that over 75% of CFOs would be willing to sacrifice economic value to hit an earnings target.
Similarly, Hodak asserts that for many companies, three-year goals based on “accounting results” (i.e., earnings or ROC) “are likely to become stale” toward the end of the period and no longer drive shareholder value. This requires companies to either redo the goals (impossible) or doggedly continue with goals that are long-since achieved or no longer worth achieving – unhelpful to shareholders.
What’s new? Now, Farient is promoting new research with MIT confirming and updating the 2019 study. In particular, the new research found that TSR is lower and pay higher among S&P 1500 firms with PSUs vs RSUs or options.
Yes, but: The issue with any research comparing pay and performance for companies that grant PSUs versus those that don’t is the overwhelming prevalence of PSUs among public companies.
The Farient study admits that 75% of the S&P 1500 award PSUs, so the data is skewed – the 25% of companies that don’t award PSUs may have unique ownership structures or other reasons why they can buck proxy advisors who demand performance metrics. This may be correlated to their high performance, rather than the equity vehicle they use.
Bottom line: It will certainly benefit all companies to have less homogenization and more flexibility in executive compensation design. The Center is committed to encouraging this while avoiding the pendulum swinging too far in the opposite direction (where PSUs become the new bogeyman).
Ani Huang
Senior Executive Vice President, Chief Content Officer, HR Policy Association
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