An award is measured once, at grant-date fair value, and spread over the period in which the employee earns it. That much is covered under stock-based compensation. What decides the expense from there is the kind of condition attached, and there are three, with three different consequences.
What are the three types of vesting condition?
A service condition requires the employee to stay for a period. It doesn't enter the fair value at all. It enters the number of awards expected to vest, which is estimated and trued up, so the cumulative expense ends at the fair value of what actually vested.
A non-market performance condition requires something the company achieves: a cumulative earnings target, a revenue threshold, a regulatory approval. It also stays out of the fair value and also goes into the expected-to-vest number. Both rulebooks require the estimate to be revised each period and the cumulative expense to be trued up. If the target is missed, the whole expense reverses.
A market condition requires something the share price does: a total shareholder return hurdle, an absolute price target, a return ranked against an index. Here the rule inverts. A market condition is priced into the grant-date fair value, usually with a Monte Carlo model. That's why an award with a total-shareholder-return hurdle is worth less per unit than an otherwise identical award without one. And because the possibility of failure has already been paid for in the measurement, the expense is never reversed if the hurdle is missed. The employee gets nothing, the shareholders paid nothing, and the income statement carries the charge anyway.
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Worked example: Pinnacle Diagnostics
Pinnacle Diagnostics granted 300,000 restricted stock units on a service condition at $52.00, 300,000 performance units on an earnings condition at $52.00, and 300,000 performance units on a relative total-shareholder-return condition at a Monte Carlo value of $38.40. The earnings target was missed and the total-shareholder-return hurdle was missed. The earnings award cost nothing over its life, because everything recognised in years one and two came back in year three. The market-condition award cost $11,520,000 and delivered not one share.
This has nothing to do with which treatment is right. Two awards of identical size, granted the same morning to the same people, both ending worthless, produce charges of $0 and $11,520,000. No line on the face of the income statement tells you which you're looking at. You'll find the condition type in the note.
What are non-vesting conditions?
A fourth category, non-vesting conditions, works like a market condition: it's priced into fair value and its failure doesn't reverse the charge. An employee-contribution requirement in a save-as-you-earn plan is the usual example.