Performance Share Units (PSUs)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on January 24, 2024

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What Are Performance Share Units (PSUs)?

Performance Share Units are a type of equity-based compensation granted to employees, typically executives and senior managers, that are earned and converted into company shares.

It is based on the achievement of specific performance goals over a predetermined period.

PSUs align employees' interests with company performance, incentivize the achievement of strategic objectives, and aid in retaining and motivating key talent.

Types of PSUs

Time-Based PSUs

Vesting Schedules

Time-based PSUs have vesting schedules that determine when employees become entitled to the underlying shares, often based on tenure or the passage of a specified period.

Performance Metrics

Even though time-based PSUs primarily rely on vesting schedules, they may still incorporate performance metrics to ensure employees contribute to the company's success during the vesting period.

Performance-Based PSUs

Performance Goals

Performance-based PSUs require employees to achieve specific performance goals, such as revenue, earnings per share (EPS), or total shareholder return (TSR) targets, to earn the underlying shares.

Relative and Absolute Performance

Performance goals for PSUs can be based on relative performance, comparing the company's results to those of industry peers or an index, or absolute performance, which focuses solely on the company's own performance.

Types of Performance Share Units (PSUs)

Designing a PSU Plan

Establish Performance Targets

Financial Targets

Financial targets for PSU plans can include revenue, net income, or return on investment (ROI) metrics, incentivizing employees to focus on the company's financial success.

Operational Targets

To promote overall company performance, operational targets for PSU plans may encompass non-financial goals, such as customer satisfaction, product development milestones, or employee engagement.

Set Vesting Periods

Cliff Vesting

Cliff vesting occurs when all PSUs vest at once after a specified period, encouraging employees to remain with the company and contribute to its success over the entire vesting term.

Graded Vesting

Graded vesting involves PSUs vesting incrementally over time, providing employees with a gradually increasing stake in the company's performance and fostering long-term commitment.

Determine Payout Levels


The threshold represents the minimum level of performance required for employees to earn any PSUs, ensuring that rewards are only granted for meaningful achievements.


The target is the performance level at which employees earn a predetermined number of PSUs, typically designed to be achievable but requiring significant effort and focus.


The maximum payout level represents the upper limit of PSUs that can be earned, capping the potential reward and encouraging employees to strive for exceptional performance.

Designing a Performance Share Unit (PSUs) Plan

Regulatory and Accounting Considerations for PSUs

Financial Reporting Requirements

PSUs are subject to financial reporting requirements, including recognizing compensation expenses and disclosing outstanding awards in financial statements, ensuring transparency and compliance with accounting standards.

Tax Implications for Companies and Employees

Both companies and employees face tax implications when granting, vesting, and selling PSUs, necessitating careful planning and consideration to optimize tax outcomes and comply with relevant regulations.

Legal and Compliance Considerations

PSUs must be structured and administered in accordance with applicable securities, employment, and corporate governance laws, requiring companies to navigate a complex legal and regulatory landscape.

Advantages of PSUs

Aligning Employee Interests with Company Performance

PSUs align employees' interests with those of shareholders by linking their compensation directly to the company's success, incentivizing them to work towards strategic objectives.

Retaining and Motivating Key Employees

By offering PSUs as part of compensation packages, companies can better retain and motivate key employees, fostering a high-performance culture and promoting long-term value creation.

Tax Benefits for Employees

PSUs can provide tax advantages for employees, as they are typically taxed at the time of vesting rather than at grant, potentially allowing for capital gains treatment on the appreciation of the underlying shares.

Reducing Cash Outflow for the Company

By granting PSUs instead of cash bonuses, companies can reduce their cash outflow, preserving resources for reinvestment in growth initiatives and other strategic priorities.

Potential Drawbacks of PSUs

Complexity in Design and Administration

PSUs can be complex to design and administer, requiring careful consideration of performance metrics, vesting schedules, payout levels, and ongoing monitoring and adjustments.

Challenges in Setting Fair and Achievable Performance Goals

Determining fair and achievable performance goals for PSU plans can be challenging, as they must strike a balance between motivating employees and ensuring that rewards are commensurate with the value created.

Volatility in Payouts Due to Market and Company Conditions

PSU payouts can be volatile, as they are tied to market and company performance, which can result in wide fluctuations in the value of the underlying shares and potentially create uncertainty for employees.

Dilution of Existing Shareholders' Ownership

The issuance of PSUs can dilute existing shareholders' ownership as new shares are created and allocated to employees upon vesting, potentially impacting the value of outstanding shares.

Advantages and Potential Drawbacks of Performance Share Units (PSUs)

Best Practices for Implementing PSUs

Regular Review and Updating of Performance Goals

Companies should regularly review and update PSU performance goals to ensure they remain relevant and aligned with the organization's strategic objectives and market conditions.

Ensuring Clear Communication with Employees

Clear communication with employees is crucial when implementing a PSU plan, as it helps to create understanding and buy-in, fostering a sense of ownership and motivation.

Balancing Short-Term and Long-Term Performance Metrics

PSU plans should balance short-term and long-term performance metrics to encourage employees to focus on both immediate and future results, supporting sustainable value creation.

Combining PSUs with Other Forms of Equity Compensation

Companies can consider combining PSUs with other forms of equity compensation, such as stock options or restricted stock units (RSUs), to create a diversified and balanced incentive structure for employees.

Final Thoughts

PSUs play an increasingly important role in modern employee compensation strategies, as they help to align employee interests with company performance and incentivize the achievement of strategic objectives.

Companies considering implementing a PSU plan should carefully weigh the potential benefits and drawbacks and consider regulatory and accounting requirements to design an effective and compliant program.

As the business landscape continues to evolve, future trends in equity compensation, including the adoption and refinement of PSUs, will likely shape the way organizations attract, retain, and motivate talent.

Organizations considering implementing a PSU plan should seek the guidance of a financial advisor to ensure the plan is designed and administered effectively, considering the company's strategic objectives, industry best practices, and regulatory requirements.

Performance Share Units (PSUs) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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