Over the last few years, a robust conversation has been brewing about the effectiveness of performance share units (PSUs) and whether shareholders would be better served by alternative equity approaches, including long-vesting equity awards. These debates have instigated fresh conversations in the boardroom about long-term incentive (LTI) strategy and which equity designs best serve the unique business and talent dynamics at individual companies, even if these designs don’t always align with pay-for-performance orthodoxy. With macroeconomic and geopolitical uncertainty now the norm, we expect these conversations to continue to gain steam, particularly as governance institutions have expressed openness to alternative LTI paths.

ISS’s 2026 policy guidelines and FAQs now recognize time-based programs as “performance-based,” provided they have at least a three-year vesting period and the overall vesting and holding period requirement exceeds five years. The change comes as recent investor surveys conducted by proxy services have begun to show a softening of support for LTI programs primarily composed of PSUs. While most investors and advisors still advocate for a weighting of 50% PSUs, the updated
policy leaves room for exploration in the coming years.

For organizations that have recently struggled to get the most out of contemporary PSU practices, shifting to a majority, or even 100% weighting, of long-vesting RSUs may offer greater stability and certainty in volatile times. Long-vesting RSUs sidestep goal-setting struggles, simplify plans, aid retention, and may better align organizations with long-term shareholder value. While we do not expect or advise all companies to shift to long-vesting RSUs, there are specific organizational contexts where the change may prove fruitful.

PSUs Are Still Effective for Most Companies, but there’s an Opening for Diversification

When done correctly, PSUs remain one of the most effective tools for focusing leadership on strategic transformation and value creation. But small cracks in the orthodoxy have prompted recent changes to ISS policy guidelines, as investors recognize that issues with PSUs can arise when done poorly. These issues can include:

• Standard and peer-prevalent metrics that do not always create the urgency needed for company-specific actions
• Goals that are too high or too low due to macroeconomic uncertainty, which makes multi-year goal projections impractical
• Multiple years of above-target or max payouts leading to the perception that PSUs are not sufficiently rigorous
• Volatile payouts creating a “feast or famine” participant experience
• Payouts misaligned with the shareholder experience and returns

Companies have tried multiple strategies to design their PSUs so they remain motivational, despite the headwinds listed above, only to see them fall out of the money in the first or second year anyway. These strategies include widening goals, diversifying and/or simplifying measures, and moving some measures to modifiers. But when these programs still fail to accurately and consistently reward performance, they can sap energy from both participants and investors, who feel like their work is not meaningfully tethered to payouts and stock returns.

Long-Vesting RSUs Promote Stability and Long-Term Value Generation, but Come with Tradeoffs

In the face of such persistent macroeconomic and geopolitical volatility, a new breed of RSUs, with vesting and holding periods of five years or longer, offers executives and investors a host of benefits and challenges worth exploring.

Benefits and Trade-Offs of 100% RSUs In LTIP

The trade-offs listed above may still raise legitimate concerns among investors. However, committees and management have several tools at their disposal to help mitigate some of the adverse tradeoffs:

• A post vesting holding requirement and/or back-weighted vesting to further tie executives to longer-term performance
• Willingness to vary the equity pool year-to-year based on performance
• The inclusion of an rTSR modifier to capture relative performance against peers

Ultimately, diligent plan designers will still be aiming to tie payouts to the shareholder experience while minimizing perverse incentives, as they have for decades, but their toolkit to achieve these goals has expanded.

Time-Based Equity Programs Will Only Thrive in the Right Contexts

The desire for strong pay-for-performance alignment in incentive plans is not going anywhere, even for the most ardent critics of PSUs. As such, organizations committed to higher long-vesting RSU percentages in LTI plans need to consider if such a program would fit their specific strategic context. Only companies with certain key characteristics will be well-suited to successfully move away from PSUs. The organizational profile that might have the most success could be those companies where:

• Business cycles are longer
• Business is cyclical
• There is a combination of a high tenure level and low executive turnover rates
• Change and growth are truly driven year-to-year, and executives need to be able to act with agility to accomplish long-term goals
• There is a need to rebuild faith in the company’s ability to perform both internally and externally
• A strong annual incentive plan is already in place that clearly communicates priorities to build long-term value

Organizations that have exhausted their available options for improving their PSU programs need to understand the benefits, trade-offs, and design features of a program that heavily utilizes RSUs. Programs cannot be easily swapped every year, and a thoughtful approach is crucial, as companies will need to commit to any changes for a significant period of time. Though it is relatively simpler than a performance-based LTI program, a switch to long-vesting RSUs still needs to be designed with care.

Moving to Long-Vesting RSU Plans Requires Careful Redesign of the Annual Incentive Plans

Moving to majority RSUs will put additional pressure on ensuring that the annual incentive plan (AIP) contains rigorous, performance-based goals that are clear drivers of future value creation and are aligned with the broader company strategy. Honing of the AIP might endeavor to:

• Include the measures most linked to long-term value creation in ways that reinforce the growth of RSUs in the LTIP, and thus have compelling linkage to the company’s long-term growth strategy
• Translate long-term transformational goals into one-year milestone measurements so that executives prioritize the near-term performance results alongside long-term outlook
• Ensure metrics require growth year-over-year to show a trajectory of improvement

Without PSUs in the LTI plan, investors will be looking for the annual plan to create both a compelling growth and a year-over-year improvement story. If the annual plan can’t demonstrate that kind of trajectory, there could be more pressure on the LTI grants. However, by moving these performance goals to the annual plan, investors and boards increase their agility and flexibility to react to the current environment. This may help incentivize performance more accurately than three-year goals set in PSUs, especially when long-term goal-setting is challenging or impossible due to volatility or a business transition.

Communicating the Rationale Behind Changes to Investors is Paramount to Success

Moving to a 100% long-vesting RSU program is a departure from the use of performance-based design elements typically favored by proxy advisors and many investors. If considered, it will be crucial for committees to anticipate changes by testing investor receptiveness in advance. Committees will likely want to consider and discuss multiple alternatives to the current PSU program with investors, only one of which might be moving to a majority of long-vesting RSUs, instead of making a unilateral change.

Some questions committees can expect from investors include:

• Why, specifically, is long-term goal-setting for PSUs difficult or counter-productive?
• How can we be sure that the metrics we’ve focused on in the annual incentive plan will contribute to long-term value creation?
• How will you ensure pay and performance don’t fall out of alignment?
• How will moving to time-based equity influence performance management and accountability?
• Ultimately, the goals of any compensation program are still to drive long-term value creation, and any changes should be rooted in a strong, consistent compensation philosophy, making it easier to communicate to key stakeholders.

Conclusion

Even with the recent shift in ISS guidelines, we expect long-vesting RSU programs to be right for only a select cohort of companies, and we do not predict a widespread shift away from PSUs anytime soon. ISS’s changing guidelines, however, create a welcome space for companies to explore their unique business and talent dynamics and to decide whether their current LTI design and equity strategies are well aligned.

For many, staying the course makes sense, but for those with some of the dynamics outlined above, the present moment offers perhaps the clearest opportunity for such companies to jettison the compensation status quo without sacrificing their commitment to long-term value creation. In such cases, long-vesting RSUs could be the answer.