Shifting Sentiments Around Long-Vesting RSUs

Key Takeaways

• ISS now treats ≥3‑year RSUs as performance‑based under 2026 guidelines
• Investor surveys show decreasing preference for pure PSU‑heavy LTI packages
• Long‑vesting RSUs simplify goals, improve retention, but reduce immediate liquidity
• Best for firms with long cycles, low turnover, strong annual incentive plans
• Boards must proactively explain RSU shift to investors to manage expectations

Pulse Analysis

The long‑term incentive (LTI) landscape is evolving as companies grapple with volatile macro conditions and the limitations of traditional performance share units (PSUs). PSUs, while effective for aligning executives with strategic transformation, often suffer from unrealistic goal‑setting, volatile payouts, and misalignment with shareholder returns. Recent ISS policy updates for 2026 recognize time‑based equity awards—specifically those with a minimum three‑year vesting period and a total holding horizon exceeding five years—as performance‑based. This regulatory shift, coupled with investor surveys indicating a waning appetite for PSU‑dominant packages, has sparked renewed boardroom discussions about integrating long‑vesting restricted stock units (RSUs) into LTI programs.

Long‑vesting RSUs offer several compelling advantages: they simplify plan design by removing complex performance metrics, enhance retention through extended vesting horizons, and provide executives with a clearer, more stable equity value trajectory. The trade‑offs include reduced immediate liquidity for participants and potentially lower upside incentives, which may dampen risk‑taking behavior. Companies with longer business cycles, low executive turnover, and robust annual incentive plans are particularly well‑suited to adopt a majority or even 100% RSU‑based LTI structure. To mitigate downsides, firms can incorporate post‑vesting holding periods, back‑weighted vesting schedules, or relative total shareholder return (rTSR) modifiers, ensuring continued alignment with shareholder interests.

Successful implementation hinges on transparent communication with investors and proxy advisors. Boards should proactively present the rationale for shifting to long‑vesting RSUs, highlighting how annual incentive plans will carry the performance rigor traditionally embedded in PSUs. By framing RSUs as a stability‑focused complement to a strong annual plan, companies can preserve pay‑for‑performance principles while adapting to a volatile environment. As ISS guidelines continue to evolve, firms that thoughtfully balance simplicity, retention, and performance signals will be positioned to attract talent and deliver sustained shareholder value.