Beyond the PSU Mandate

A Compensation Committee Roadmap for Evaluating Long-Term Incentives in 2026

U.S. executive compensation has come to rely heavily on Performance Share Units (PSUs). PSUs are awards of stock units which are earned based on pre-established financial and/or market goals, most commonly measured over a three-year performance period. The widespread adoption of PSUs was partly driven by proxy advisor expectations to grant at least half of executive annual long-term incentives (LTI) in PSUs. Failure to comply invited criticism and a challenged Say-on-Pay outcome, a risk few Compensation Committees were willing to endure. The result was a homogenized landscape where, for some companies, proxy advisor compliance may have taken precedence over strategic alignment.

Has the pendulum swung too far toward PSUs? Some investors think so and, in 2026, proxy advisors have signaled greater flexibility toward alternative LTI structures. This article explores why the three-year PSU model is under pressure and provides a 2026 roadmap for Compensation Committees when evaluating LTI design for 2027.

The Challenge: Three-Year Goal-Setting

Norway’s Norges Bank Investment Management (NBIM), the world’s largest sovereign wealth fund, has been among the most prominent critics of PSUs1. Their primary concerns center on the inherent difficulty of setting meaningful three-year financial targets, a process that often leads to “windfall” payouts during market upswings or “wipeouts” during downturns. In the latter case, Committees frequently face pressure to grant special retention awards, undermining the original intent of the plan. NBIM has also highlighted the complexity of tracking overlapping performance metrics across multiple concurrent grant cycles.

For many companies, the past several years have felt like an era of “permacrisis” marked by a pandemic, economic cyclicality, shifting consumer behavior, supply chain disruptions, geopolitical conflict, and the rapid emergence of disruptive technologies. Setting precise three-year targets in this environment can be a guessing game, producing an incentive that functions more like a lottery ticket than a driver of long-term executive decision-making.

A Pivot in Proxy Advisor Perspective

NBIM and other non-U.S. investors have voiced a preference for long-term, time-based equity over PSUs. This shift in perspective has prompted proxy advisors to relax their existing policies, providing companies with more latitude in LTI design:

• ISS will no longer automatically criticize companies granting less than 50% in PSUs, provided the time-based equity component is sufficiently “long-term,” defined as meeting one of the following thresholds:
  • 5-year ratable or cliff vesting;
  • 4-year vesting plus a 1-year post-vest holding requirement; or
  • 3-year vesting plus a 2-year post-vest holding requirement.
• Glass Lewis will also no longer automatically criticize companies granting less than 50% of LTI in PSUs. However, they will evaluate the overall LTI program holistically. Any reduction in PSUs should be offset by a reduction in target pay opportunity (to account for the greater certainty of time-vested awards), longer vesting periods, and sufficient rationale in the proxy statement.

The New LTI Spectrum

We view the current LTI landscape as a spectrum. At one end lies the status quo: an LTI mix dominated by three-year PSUs. For stable, mature companies with predictable cash flows, the three-year PSU continues to work well, and we expect many U.S. companies will maintain these structures. At the other end of the spectrum lies a transformational shift toward long-term, time-based equity, as now accommodated by the new proxy advisor policies. This should be reserved for a small group of companies navigating intense volatility or turnarounds.

The unexplored middle ground, however, offers the most interesting design opportunities, structures that prioritize retention and long-term ownership while preserving a meaningful performance linkage. Examples may include:

• Rebalancing the LTI mix: Reducing PSUs to 30–40% of LTI while allocating the remainder to long-term time-vested equity (e.g., RSUs with a 5-year ratable vest). This preserves a performance component while shifting the center of gravity toward long-term ownership and retention.
• Repositioning stock options as “performance-based”: Options inherently carry performance leverage; they only deliver value if the stock price appreciates. But, they are not perceived as “performance-based” by proxy advisors. Attaching a 5-year vest/hold strengthens retention while satisfying proxy advisor expectations. Read FW Cook’s piece Could Stock Options Make a Comeback?
• The “1-3-5 PSU”: Maintaining PSUs, but compressing the performance period from three years to one year to mitigate financial goal-setting challenges. Earned shares do not vest until the third anniversary of grant with a subsequent two-year post-vest holding period (i.e., 1-year performance period, 3-year vest, 5-year hold). This design can be further enhanced by applying a relative TSR metric or modifier over the 3-year vesting period.

The U.S. Investor Landscape

The proxy advisor policy changes provide a useful signal, but they do not constitute a “safe harbor.” Their influence may diminish in the coming years amid regulatory scrutiny and as institutional investors evaluate alternative research platforms and providers. We anticipate that investors will increasingly rely on their own internal voting policies rather than proxy advisor policies and recommendations. As covered in our Committee Roadmap below, continued monitoring of U.S. investor sentiment and direct engagement during 2026 is essential to ensure a Committee does not move faster than its shareholder base is willing to travel. A premature shift away from PSUs could trigger a low Say-on-Pay vote, regardless of proxy advisor flexibility.

Our Committee Roadmap: Use 2026 as the “Diagnosis Year”

We advise approaching 2026 as a year of LTI evaluation. Our role as consultants is to diagnose the health of the current program, explore creative alternatives where warranted, and facilitate investor engagement. The objective for 2026 is not to change the plan, but to ensure the plan is a strategic asset rather than a compliance burden.

Phase 1: Diagnosis (Spring/Summer 2026)

We recommend all companies, even those comfortable with the continued use of three-year PSUs, complete this phase.

• The “Broken” Test: Analyze your historical PSU cycles. Did payouts correlate with relative shareholder value creation and financial performance, or were they primarily driven by goal-setting miscalculations? If it isn’t broken, don’t fix it. We anticipate that for many clients, PSUs will continue to work well.
• Investor Scan: Outline your top ten shareholders and track any evolution in voting policy from 2025 to 2026. Identify “Traditionalists” who favor the PSU status quo versus “Reformers” who signal comfort with alternative designs.
• First-Movers: Review proxy disclosure, proxy advisor feedback, and investor reaction to companies that have already moved away from PSUs.

Phase 2: Evaluating Alternatives (Summer/Fall 2026)

• Explore the “Middle Ground”: Consider alternative LTI structures that balance performance expectations with long-term ownership and retention.
• Internal Survey: Survey employees on their LTI preferences. Committees may find that participants value the certainty of ownership more than the payout leverage of a three-year PSU – or vice versa. These insights can inform design decisions and strengthen the proxy narrative.

Phase 3: Engagement & Execution (Fall/Winter 2026)

• The “Off-Season” Roadshow: If the Committee is considering a change, proactively socialize the concept with your top ten investors before the proxy season and gather feedback.
• Proxy Disclosure: Use the 2027 proxy statement to signal that a review of LTI is underway. If a decision has been reached by the time the proxy is filed, forward-disclose the new design and assess investor and proxy advisor reactions.

Committees now have a broader toolkit to move from “Compliance-Driven Design” to “Strategy-Driven Design.” For 2026, the mandate is clear: diagnose the health of the current LTI program and determine whether a shift is the right fit for the company’s unique economic reality.