PSU stands for Performance Share Unit. It is a type of equity compensation used by companies to reward employees based on the company's performance.
Key Characteristics of PSUs
- Granted to employees with a specified vesting period
- The number of shares that vest is based on the company's performance during that period
- Performance metrics typically tied to financial performance (e.g., revenue growth, earnings per share, total shareholder return)
- Often used by publicly traded companies
Purpose of PSUs
PSUs serve several purposes for companies:
- Incentivize employees to contribute to company performance
- Retain valuable employees
- Align interests of employees with those of the company's shareholders
How PSUs Work
- Grant: Employees are granted PSUs at the beginning of a performance period.
- Performance Period: The company's performance is measured over a specified time frame.
- Vesting: At the end of the performance period, PSUs vest based on achieved performance targets.
- Settlement: Vested PSUs are typically settled in company shares or cash equivalent.
Comparison to Other Equity Compensation
PSUs differ from other forms of equity compensation:
- Unlike stock options, PSUs always have some value if they vest
- Unlike Restricted Stock Units (RSUs), the number of shares received depends on performance, not just time
Considerations for Employees
Employees granted PSUs should consider:
- Understanding the performance metrics and targets
- The potential value of PSUs based on company performance
- Tax implications of receiving and selling PSU shares
In summary, PSUs are a performance-based form of equity compensation that ties employee rewards directly to company performance, serving as a powerful tool for aligning employee and shareholder interests.