In today’s governance landscape, 95% of S&P 500 companies now utilize Performance Share Units (PSUs) in their executive compensation frameworks—a substantial increase from 76% in 2012. This shift reflects the market’s demand for stronger pay-for-performance alignment, with PSUs now constituting approximately 60% of the average CEO’s long-term incentive mix. Particularly notable is the widespread adoption of Total Shareholder Return (TSR) metrics, with 72% of S&P 500 companies incorporating relative TSR in their long-term incentive plans [1].
TSR—measuring stock price appreciation plus reinvested dividends over time—is widely regarded as “the ultimate measure of a company’s achievement for shareholders over the long term.” Its prevalence stems from both its intuitive alignment with shareholder interests and practical considerations: relative TSR effectively “filters out macroeconomic noise” beyond management’s control while focusing on market returns—what investors ultimately value.
The ASC 718 Compliance Challenge
The proliferation of TSR-linked PSUs presents a significant technical challenge: proper valuation for accounting and disclosure purposes. Under ASC Topic 718, awards with market-based performance conditions like TSR require fair-value modeling that captures the market condition—specifically through Monte Carlo simulations. This complex process involves simulating hundreds of thousands of stock-price paths for the company and peers to account for volatility, correlations, dividends, and probabilistic payout formulas.
Compliance demands both precision and robust documentation. Monte Carlo simulations typically show that TSR-conditioned awards have fair values 10%-20% higher than the current stock price, which directly impacts grant sizing. Without accounting for this premium, boards may inadvertently grant awards that will be reported at significantly higher values than intended in proxy statements—a Pay Governance study [2] illustrated how an intended $1,000,000 TSR-PSU grant could be reported as $1,200,000 in the Summary Compensation Table if grant sizing doesn’t account for the Monte Carlo fair value premium.
Benefits of Advanced Valuation Tools
Precision through Robust Monte Carlo Modeling
Advanced tools like Ankura’s platform employ rigorous Monte Carlo simulations—projecting 250,000+ stock-price paths for the company and peer group—to deliver highly accurate fair value estimates. The modeling incorporates all critical inputs (risk-free rates, dividend yields, volatility, correlation) and applies the actual plan design to ensure valuation accurately reflects award terms.
Audit-Ready, ASC 718-Compliant Reporting
Sophisticated valuation tools provide boards with confidence in compliance by delivering detailed documentation aligned with ASC 718 requirements and GAAP principles. All assumptions are thoroughly documented within a consistent, defensible framework that stands up to auditor scrutiny—ensuring accurate PSU accounting expense and preparedness for regulatory review.
Peer Benchmarking and Performance Calibration
By modeling relative TSR performance against chosen peer groups, these tools provide insights beyond accounting values. Boards can test how different peer selections impact the difficulty of achieving target TSR and assess payout probability under various scenarios—enabling informed goal-setting and calibration of PSU design to ensure targets are appropriately rigorous.
Enhanced Governance Integrity
Using independent, sophisticated valuation demonstrates to investors and proxy advisors that the board is serious about pay-for-performance alignment. This external validation signals that executive awards will not produce windfalls—any payout will have been earned via superior TSR performance and accounted for with rigor, strengthening overall governance posture.
Conclusion
In today’s environment of intense scrutiny, sophisticated valuation approaches are no longer optional—they represent a necessary tool for compliance and good governance. By utilizing advanced TSR-based PSU valuation tools like Ankura’s, boards ensure accounting accuracy, policy compliance, and pay-for-performance integrity in executive compensation programs. Such tools provide the analytical foundation for informed decisions—from grant sizing to payout validation—while withstanding scrutiny from auditors, investors, and proxy advisors.
For board members across industries, investing in robust TSR valuation solutions represents an increasingly critical step in strengthening oversight of executive compensation and maintaining shareholder trust. These tools enable compensation committees to design and administer PSU awards that are fair, transparent, and genuinely aligned with shareholder value creation—a governance imperative in today’s corporate landscape.
References
[1] Segal, S., & Sanford, K. (2025, June 11). Pulse on pay: 12 years of CEO pay long-term trends in S&P 500 executive compensation. Harvard Law School Forum on Corporate Governance. https://corpgov.law.harvard.edu/2025/06/11/pulse-on-pay-12-years-of-ceo-pay-long-term-trends-in-sp-500-executive-compensation/ Exequity LLP. (2021, November 9). Relative TSR prevalence and design of S&P 500 companies. https://www.exqty.com/uploads/6/9/9/0/69908991/rtsr_prev_and_design_of_sp500_20211109.pdf
[2] Pay Governance. (2017, January 4). Effectively administering your relative TSR program – learning and best practices. Pay Governance. Retrieved from https://www.paygovernance.com/viewpoints/effectively-administering-your-relative-tsr-program-learning-and-best-practices
