Pay Governance Strikes Back on Performance Shares

What’s new: In the latest salvo in the ongoing debate over performance shares, a new Pay Governance piece finds that institutional investor support for PSUs remains strong.

• 43% of investors are satisfied or very satisfied with current pay and performance alignment while 30% are neutral and 27% reported being dissatisfied.
  
  
• As to the preferred form of long-term incentive, 37% of respondents expressed a preference for PSUs, 34% for both PSUs and long-vesting time-based RSUs, and 24% for long-vesting time-based RSUs.
  
  
• When it comes to the mix, just over half (51%) prefer long-term incentives to be mostly PSUs, 35% prefer a mix of 50/50 PSUs and RSUs and 14% prefer mostly time-based RSUs.
  
  
• Interestingly, 52% of investors said they consider standard stock options with time-vesting performance-based. This begs the question of whether options would be an acceptable substitute for PSUs (the study did not query this).

Why it matters: Despite skepticism from some corners, most large investors still view PSUs as the best alignment tool for linking pay with performance. However, this could change if proxy advisors revise their policies and more research comes to the fore showing the relative efficacy of options and RSUs.

Meanwhile, the critics:

• Norges Bank Investment Management argues PSUs are overly complex and misaligned to long-term performance, and prefer a simpler RSU-based model with longer vesting.
  
  
• Farient Advisors research found PSU-heavy companies often deliver weaker shareholder returns and higher CEO pay than peers relying more on time-based equity.

Bottom line: With studies using different datasets, methodologies, and definitions of alignment, the debate is unsettled. For now, boards must stay flexible, align incentives with strategy, and be ready to adjust as investor and advisor expectations evolve.