Beyond the PSU Mandate

Key Takeaways

• ISS now accepts <50% PSUs with long‑term vesting criteria.
• Glass Lewis evaluates LTI holistically, not just PSU percentage.
• Middle‑ground mixes 30‑40% PSUs with 5‑year RSUs.
• “1‑3‑5 PSU” compresses performance period to one year.
• 2026 should be diagnosis year before any LTI changes.

Summary

Executive compensation in the U.S. has been dominated by three‑year Performance Share Units (PSUs), driven by proxy‑advisor pressure for at least 50 % PSU allocations. In 2026, major advisors ISS and Glass Lewis are easing that rule, allowing lower PSU percentages if time‑based equity meets longer‑vesting thresholds. The article outlines a three‑phase 2026 roadmap for Compensation Committees to diagnose current LTI effectiveness, explore hybrid structures, and engage investors before any redesign. It emphasizes moving from compliance‑driven to strategy‑driven incentive plans.

Pulse Analysis

The three‑year PSU model became the industry norm as proxy advisors demanded that at least half of long‑term incentives be performance‑based. Critics such as Norway’s sovereign fund NBIM argue that setting meaningful three‑year targets is increasingly untenable amid pandemic fallout, supply‑chain shocks, and rapid technological change. When targets miss, companies either overpay executives during up‑cycles or resort to retention awards during downturns, diluting the intended alignment between pay and shareholder value.

In response, ISS and Glass Lewis have softened their stances for 2026, permitting lower PSU ratios if companies adopt longer‑vesting time‑based equity—five‑year ratable or cliff vesting, or hybrid vest‑plus‑hold structures. This policy shift opens the door to hybrid LTI mixes: reducing PSUs to 30‑40 % while adding five‑year RSUs, or re‑branding stock options as performance‑linked tools. Innovative designs like the “1‑3‑5 PSU,” which shortens the performance window to one year but extends vesting and holding periods, aim to preserve performance incentives without the forecasting burden of a three‑year horizon.

Compensation committees should treat 2026 as a diagnostic year, evaluating whether existing PSU plans truly drive value creation. A phased approach—diagnosis, alternative exploration, and investor engagement—helps align incentive structures with company strategy and shareholder expectations. Early dialogue with top investors can pre‑empt Say‑on‑Pay resistance, ensuring any LTI redesign is viewed as a strategic improvement rather than a compliance tweak. This proactive stance positions firms to balance retention, ownership, and performance in an increasingly volatile market.