PSUs’ Biggest Surprise: Negative Discretion

This is the scenario that catches even executives who understand every other part of their PSU grant. The performance period ends. The numbers come in above target. At certification, the formula in your plan document calculates a clear, favorable performance multiplier. And then the payout you actually receive is lower than that number.

Nothing was miscalculated.

Nothing was hidden.

Your compensation committee used a right it had all along.

Many PSU plans give the compensation committee a reserved right called negative discretion: the ability to reduce a calculated payout below what the formula actually produces, even after performance has been measured and the multiplier applied.

Most often, this gets applied to the calculated result itself, uniformly across everyone holding the same grant, since that formula typically measures shared company-wide metrics. This kind of across-the-board reduction usually comes down to a concern about a windfall that does not represent genuine performance by the executive team. The formula may have produced a strong number, but the committee notes dynamics outside management’s control - a macro tailwind, a one-time accounting effect, an industry-wide shift - that may have inflated the result for reasons that had nothing to do with actual execution. This became especially common from 2020 through 2022, when many formulas tied to stock performance or earnings produced unusually strong results driven by pandemic-recovery conditions more than anything a given leadership team actually did. As a result, committees faced real pressure from investors to correct for it.

Some plans also reserve the right to apply negative discretion differently, executive by executive, based on that person’s own individual performance. If your own reduction was applied individually and you’re questioning whether it was handled fairly, that’s a more personal question than this module is built to answer, and one worth its own dedicated treatment elsewhere on the platform. Either way, it’s a contractual power the plan document gave the committee at the outset, sitting quietly alongside the formula the entire time, whether or not it’s ever used.

Why negative discretion has become standard

Negative discretion isn’t unique to PSUs. It’s a general governance right compensation committees reserve across incentive plan types, and it shows up more often, and is far less surprising, in short-term or annual bonus plans.

Part of why bonus plans were built this way in the first place traces back to a tax rule: before 2017, Section 162(m) of the U.S. corporate tax code let companies deduct executive pay above $1 million only if it qualified as “performance-based.” Qualifying often required a formula that the compensation committee could only adjust downward, never up. That exception was repealed in 2017. The $1 million cap itself never went away, and still applies today, but the tax incentive to build negative-discretion-only formulas is gone.

However, the practice of utilizing negative discretion remains because it had already become a standard, expected part of executive compensation plan design, independent of the tax reason that originally created it.

This is not merely a hypothetical possibility. In 2024, Archer-Daniels-Midland’s compensation committee faced this exact scenario with the company’s 2022 to 2024 PSU grant. The formula, based on return on invested capital, earnings per share, and an ESG modifier, calculated a payout of 112% of target. However, the compensation committee exercised negative discretion, cutting the number of shares actually earned by half for several named executives, and to zero for one executive entirely.

The reduction was tied to an ongoing investigation into the company’s accounting practices in a specific business segment. While no executive was found to have done anything wrong, the committee reduced the payout regardless, to demonstrate accountability at the leadership level. This is also a real example of the individual-versus-uniform distinction covered above: the same formula produced one number for everyone, and, in this case, the committee then applied discretion differently, executive by executive, based on each person’s role during the period in question.

When discretion is exercised, this is the pattern it tends to follow: a real, specific reason, applied deliberately, not a routine override of results the business actually produced.

In most plans, this discretion runs in one direction only: down. A smaller number of plans reserve discretion to move a payout in either direction, which is a meaningfully different, and meaningfully bigger, grant of authority to the committee. Either way, the existence of this provision means the performance multiplier calculation covered in PSU Payout Drivers: Metrics and Design is not always the final word. It's the starting point the committee is entitled to adjust.

Where to find it in your own paperwork

Your plan document and award agreement will state whether your company’s PSU plan confers discretion to your compensation committee, and if so, whether it runs negative or both negative and positive. This is the kind of provision that’s easy to skim past, since it rarely gets exercised, until the one year it does. If your company is public, the compensation committee’s own report in the annual proxy statement is usually where any discretion exercised for the most recently completed performance period gets disclosed and explained, typically alongside the reasoning behind it.

A calculated PSU performance multiplier is a real number, but it isn’t always a guaranteed one. If your plan reserves negative discretion, your compensation committee can move that number down after the fact, and in most plans, only down. Knowing this provision exists before it’s ever used is what separates being surprised by it from simply expecting it as one more thing to check in your own paperwork.