What are Performance Share Units (PSUs) and how are they valued?

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AcadiFi · Accepted Answer

Performance Share Units (PSUs) are RSU-like instruments where the number of shares ultimately delivered depends on achieving performance or market targets, often expressed as a payout range (0% to 200% of target). Case study: Aralon Therapeutics grants 20,000 target PSUs to its CEO. Payout = 0% if 3-yr cumulative revenue CAGR < 8%, 100% at 12%, 200% if >= 16%. Current share price: $55. For NON-MARKET performance conditions (revenue CAGR), fair value = share price × units expected to vest. Initial estimate: 100% payout probability, so 20,000 units × $55 = $1,100,000 expensed over 3 years ($366,667/year). If year 2 estimate shifts to 150% payout, cumulative true-up recalculates to $1,650,000 × (2/3) = $1,100,000, so year 2 expense jumps to $733,333. For MARKET-condition PSUs (relative TSR), a Monte Carlo determines grant-date fair value incorporating the payout function. No subsequent true-up — expense is fixed regardless of actual outcome. Hybrid PSUs (market + performance) require both: Monte Carlo for the market portion and probability estimates for the performance portion. ```mermaid flowchart TD A[PSU Grant] --> B{Condition Type} B -->|Performance| C[Est. payout %
true-up each Q] B -->|Market TSR| D[Monte Carlo
fixed FV] B -->|Hybrid| E[Both methods] ``` Analyst tip: PSU footnotes often disclose target vs. maximum payout. The diluted-EPS denominator should reflect expected payout units, not target.

What are Performance Share Units (PSUs) and how are they valued?

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