As I mentioned in an earlier post, performance equity instruments still get lumped together like a bowl of mixed nuts. Of these instruments, Performance Accelerated Units (PAUs) are one of the easiest for participants to understand. Essentially, they are time-based RSUs with vesting that accelerates if certain goals or triggers are met. It is important to note that PAUs are not strictly pay for performance because value is built in from the start and vesting will occur based on service if the goals are not met. This makes them nearly the polar opposite of the Performance Equity Units (PEUs) were covered in my last equity compensation post. Once again, I will caution that the names and acronyms for performance equity instruments are still more art than science. What I call PAUs may be identified via myriad of other names. The true definition is in the details of how the awards work.
Currently, PAUs are given most often when there is a clear threshold that can be identified as critical future success. This may be an event like a Change in Control (CIC) or IPO, or it may be a trigger like achieving and maintaining a stock price for given period of time. In this way, all RSUs that have a CIC vesting provision can be considered PAUs, but it is cleaner to focus on those awards where the trigger is the event on the horizon that drives performance. Generally, holders of basic RSUs are not single-mindedly focused on a change in control, while holders of PAUs may have that as their Key Performance Indicator.
Historically, companies added a performance goal as an accelerator because it allowed the same basic accounting as time-based vesting. This seems like hundreds of years ago, before the rollout of FAS 123R (now called ASC718) in 2004. With the change in accounting rules, the compensation expense for most plans was (kind of) leveled. Time-based equity now has an expense and performance-based equity has a similar expense. Now the reasoning to use one form of equity instead of the other is mostly strategic.
So, where can PAUs be used effectively? Project work is a good example. Let’s say you have a multi-year software development project. Your next wave of success depends on two things: 1) A timely completion 2) A fully functional solution. If the fully functional solution can be completed earlier, it should significantly benefit the business. The key here is delivering fully functional software. Simply delivering something early is not good enough. To use an accelerator goal like this you must be willing to take the time to clearly define the details behind the goal. You must also understand the potential of the goals being met early.
Quick story. Many years ago a company used PAUs for an all-employee plan. Acceleration was based on the stock price remaining above a certain level for at least sixty consecutive days. They projected it would take at least 5 years to hit this level and did not immediately build the software to support this program. Then the dotcom craze happened and drove their stock to the achievement level in less than a year. Everyone vested, but the company had no way to process the transactions. The big win for the company became a big loss for employee relations.
PAUs are an effective, if limited, form of equity compensation. While used less today than at most times in the past, they can be very useful for targeted programs. If you would like a quick reference tool for performance equity, feel free to access Performensation's Performance Equity Design and Use Matrix. As always, you can reach out to me directly if you have specific questions.