For performance equity tied to outperforming an index — the most common form: relative TSR PSUs vs the S&P 500. ASC 718 requires market conditions to be priced via simulation, with the fair value fixed at grant date and recognized over the service period regardless of whether the market condition is achieved. We run 1,000-10,000 simulated geometric Brownian motion price paths, compute the vesting payout at each path's endpoint vs the index, and produce the per-PSU fair value.
We model the index as a single geometric Brownian motion correlated with the company. Reasonable defaults: S&P 500 (σ ≈ 18%, correlation 0.6); Russell 3000 (σ ≈ 20%, correlation 0.65).
Typical TSR PSU: 50% payout at threshold (~25th percentile vs peers), 100% at target (~50th), 200% at max (~75th). Linear interpolation between tiers. Below threshold = 0 payout.