What are Performance Stock Units (PSUs)?
Performance Stock Units are RSUs with a performance requirement. Instead of a fixed number of shares that vest over time, you’re granted a “target” number of units, and how many shares you actually receive depends on how well the company performs against goals that are set on the grant date. Performance is usually measured over a three-year period, and most plans also require you to still be employed at the end of it.
Common performance goals include:
- Relative total shareholder return (TSR): how the company’s stock performed compared to a peer group or an index
- Revenue or ARR growth
- Earnings per share (EPS)
- Operating margin or free cash flow
The payout usually ranges from 0% to 200% of the target. If the company misses the minimum goal, you get nothing. If it blows past its goals, you can receive up to double your target. PSUs are most common for executives and senior leaders at public companies, but more companies are starting to use them further down the organization.
How do PSUs work?
Example: An employee is granted 2,000 target PSUs on January 1, Year 1. The performance period runs three years, through December 31, Year 3, and the goal is relative TSR against a peer group:
| Company’s TSR rank vs. peers | Payout | Shares earned |
|---|---|---|
| Below 25th percentile | 0% | 0 |
| 25th percentile (threshold) | 50% | 1,000 |
| 50th percentile (target) | 100% | 2,000 |
| 90th percentile or higher (maximum) | 200% | 4,000 |
Results between those levels are usually calculated on a straight line. Say the company finishes at the 70th percentile, halfway between target and maximum. The payout is 150%, so the employee earns 3,000 shares.
The board’s compensation committee has to certify the results before anything is paid, which usually happens a few weeks after the performance period ends. Say the shares are delivered in February, Year 4, when the stock is trading at $60.
How are PSUs taxed?
There’s no tax when PSUs are granted, and none during the performance period, because nothing has been earned yet. When the shares vest and are delivered, the number of shares you actually earned times the stock price on that day is ordinary income. It’s added to your W-2 and is subject to income tax, Social Security and Medicare, just like RSUs.
In our example, that’s 3,000 shares × $60, or $180,000 of ordinary income in one year. The withholding works the same way as RSUs too, usually sell-to-cover at the flat 22% federal supplemental rate, which is $39,600. If the employee is in the 37% bracket, they actually owe $66,600, leaving them $27,000 short on this one vest.
After vesting, your cost basis is the value you were taxed on ($60 per share), and your holding period for capital gains starts. From there, it’s the same as any other stock you own.
Many PSU plans also accumulate dividend equivalents during the performance period and pay them out on the shares you actually earn. Those payments are taxed as wages, not as qualified dividends.
What makes PSUs tricky from a tax perspective?
- You don’t know the number until the end. You could receive anywhere from zero to double your target, so tax planning means modeling a range (threshold, target and maximum) instead of a single number.
- Three years of value lands in one tax year. PSUs usually vest all at once at the end of the performance period. That lump of income can push you into the top bracket, which is exactly where the gap between 22% withholding and what you actually owe is largest.
- The same 1099-B problem as RSUs. When you sell your PSU shares, your broker may report a cost basis of $0 or leave it blank. If you don’t correct it to the value you were already taxed on, you’ll pay tax twice on the same income.
What are Performance Share Awards (PSAs)?
Performance Share Awards (sometimes called performance stock awards) are the RSA version of a PSU. Instead of a promise to deliver shares later, actual shares are issued up front and are forfeited if the performance goals aren’t met. By default they’re taxed when they vest, just like PSUs.
Because they’re actual shares, an 83(b) election is technically available. But it rarely makes sense here. If the performance goals aren’t met and the shares are forfeited, you can’t recover the tax you paid on the election.
One word of caution: companies don’t use these names consistently. Some call PSUs “performance shares,” and some use “PSA” to mean something else entirely. The best way to know what you have is to read your award agreement and confirm whether you hold units (a promise to deliver shares) or actual shares, because the tax treatment depends on it.
PSUs can be some of the most valuable equity compensation you’ll ever receive, but they’re also the hardest to plan for. Knowing the range of possible outcomes ahead of the vesting date is what keeps a great payout from turning into a surprise tax bill.
This article is for general educational purposes and is not tax advice for your specific situation. Figures reflect 2026 federal tax rules.