[Form of Agreement for Employees with Executive Officer Benefits Agreement] POWERINTEGRATIONS, INC. PERFORMANCE STOCK UNITGRANT NOTICE (2007 EQUITY INCENTIVE PLAN)

Exhibit 10.1

[Form of Agreement for Employees with Executive Officer Benefits Agreement]

POWER INTEGRATIONS, INC.

PERFORMANCE STOCK UNIT GRANT NOTICE

(2007 EQUITY INCENTIVE PLAN)

Power Integrations, Inc. (the “Company”), pursuant to its 2007 Equity Incentive Plan (the “Plan”) hereby grants to Participant the Maximum Number of Performance Stock Units as set forth below (the “PSU Grant”). This PSU Grant is subject to all of the terms and conditions as set forth herein, and in the Performance Stock Unit Agreement and the Plan, each of which is attached hereto and incorporated herein in its entirety. This PSU Grant is a “restricted stock unit” granted pursuant to Section 6(b) of the Plan and a “performance stock award” granted pursuant to Section 6(d) of the Plan. Capitalized terms not otherwise defined herein will have the meanings set forth in the Plan or the Performance Stock Unit Agreement. Except as otherwise expressly provided herein, in the event of any conflict between the terms in the PSU Grant and the Plan, the terms of the Plan will control.

Additional Terms/Acknowledgements: The undersigned Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Performance Stock Unit Agreement and the Plan. Participant also acknowledges receipt of the Power Integrations, Inc. 2007 Equity Incentive Plan Prospectus. In addition, Participant acknowledges that Attachments I and IV to this Grant Notice govern the treatment of the PSU Grant under Participant’s [Amended and Restated] Executive Officer Benefits Agreement. Participant further acknowledges that, as of the Date of Grant, this Grant Notice, the Performance Stock Unit Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the PSU Grant and supersede all prior oral and written agreements on that subject.

ATTACHMENT I

PSU VESTING CRITERIA

Capitalized terms used herein but not defined will have the meanings set forth in the Grant Notice or the Company’s 2007 Equity Incentive Plan, as applicable. A Performance Stock Unit will vest only if the Performance Vesting Criteria with respect to such Performance Stock Unit are satisfied and if the Participant remains in Continuous Service as an Employee, Director or Consultant through the Employment Vesting Date indicated in the Grant Notice.

PERFORMANCE VESTING CRITERIA

The number of Performance Stock Units that will satisfy the Performance Vesting Criteria will be determined by the Company’s Compensation Committee or its designee (the “Committee”) subject to the performance conditions as determined by the Committee (the “Performance Conditions”) as set forth below:

The Performance Conditions for a target award of the Performance Stock Units will be based on “Net Revenue” and “Non-GAAP Operating Income.” Vesting is calculated independently for Net Revenue and Non-GAAP Operating Income. Vesting of [        ]% of the PSUs is based on achievement of Net Revenue Performance Conditions, and vesting of [        ]% of the PSUs is based on Non-GAAP Operating Income Performance Conditions. The following table sets forth the percentage of the Target Number of Performance Stock Units (as set forth in the Grant Notice) vested (i.e., earned) at the given Performance Condition achieved:

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In the event the actual Performance Condition achieved falls between two levels, the percentage vested will be determined by straight line interpolation. For the purposes of satisfaction of the Performance Conditions, the term “Net Revenue” is as set forth in the Company’s annual report for [            ] filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.

For the purposes of satisfaction of the Performance Conditions, the term “Non-GAAP Operating Income” means operating income for [            ] determined in accordance with generally accepted accounting principles but excluding (i) any FAS 123R expenses; and (ii) any extraordinary income and or expenses associated with mergers and acquisitions or divestitures, patent lawsuit settlements and IRS settlements.

In the event of a divestiture of a portion of the Company’s business operations in [            ], the Performance Conditions will be adjusted and/or the results of the divested operations excluded in the computation in a manner to reflect the portion of the Performance Criteria expected to be satisfied by the divested operations during the balance of the fiscal year.

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No later than the earlier of (a) [            ] (            ) days after the receipt by the Committee of the audited financial statements for [            ] or (b) [            ] (            ) days prior to the Final Issuance Date indicated in the Grant Notice, the Committee will determine to what extent the Performance Conditions for the PSU Grant were achieved, and what number of Performance Stock Units subject to the PSU Grant will therefore be vested. Performance Stock Units will not be deemed to be vested based upon the attainment of Performance Conditions unless and until the Committee makes such determination and only if the Participant remains in Continuous Service as an Employee, Director or Consultant through the Employment Vesting Date. The Committee will have the sole and absolute discretion to reduce the number of Performance Stock Units that are deemed to vest in accordance with the Performance Vesting Conditions. The Committee will not have discretion to increase the number of Performance Stock Units that are deemed to vest in accordance with the Performance Vesting Conditions.

For purposes of satisfaction of the Performance Conditions, no subsequent agreement will be effective to amend, alter or waive satisfaction of the Performance Conditions applicable to the PSU Grant unless such agreement specifically provides for amendment of the Performance Conditions applicable to the PSU Grant.

TREATMENT UPON A CHANGE IN CONTROL

Upon the occurrence of a “Termination Upon Change in Control” (as defined in the Participant’s [Amended and Restated] Executive Officer Benefits Agreement), the Performance Stock Units will be treated as a “target bonus” under Section [4(a)(i)] of Participant’s [Amended and Restated] Executive Officer Benefits Agreement. For purposes of Section [4(a)(i)] of the Participant’s [Amended and Restated] Executive Officer Benefits Agreement, “target bonus” will be based on the Target Number of Performance Stock Units. The Performance Stock Units deemed vested pursuant to this paragraph will be paid in shares of the Company’s common stock equal to the number of Performance Stock Units deemed vested.

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ATTACHMENT II

POWER INTEGRATIONS, INC.

PERFORMANCE STOCK UNIT AGREEMENT

Power Integrations, Inc. (the “Company”) hereby grants to the Participant (“you”) named in the attached Performance Stock Unit Grant Notice (“Grant Notice”), and you hereby accept, the grant of Performance Stock Units (the “PSU Grant”) pursuant to the terms set forth in the Grant Notice, its attached PSU Vesting Criteria, the Plan and this Performance Stock Unit Agreement (“Agreement”). A copy of the PSU Vesting Criteria is attached to the Grant Notice as Attachment I, and a copy of the Plan is attached to the Grant Notice as Attachment III. Capitalized terms not explicitly defined in this Agreement but defined in the Plan or the PSU Vesting Criteria will have the same definitions as in the Plan or PSU Vesting Criteria, as applicable.

The details of your PSU Grant, in addition to those set forth in the Grant Notice, the PSU Vesting Criteria and the Plan are as follows:

1. PSU GRANT. This PSU Grant represents the right to be awarded on a future date a number of Performance Stock Units not exceeding the Maximum Number of Performance Stock Units indicated in the Grant Notice in the event the PSU Vesting Criteria are met and if you remain in Continuous Service as an Employee, Director or Consultant through the Employment Vesting Date. This PSU Grant was granted in consideration of your services to the Company. Except as otherwise provided herein, you will not be required to make any payment to the Company (other than past or future services to the Company) with respect to your receipt of the PSU Grant, the award of Performance Stock Units, the vesting of the Performance Stock Units, or the delivery of common stock in respect of the PSU Grant.

2. VESTING. Subject to the limitations contained herein, your awarded Performance Stock Units will vest, if at all, in accordance with the PSU Vesting Criteria set forth on Attachment I to the Grant Notice. Any awarded Performance Stock Units that have vested in accordance with the PSU Vesting Criteria are “Vested Units.” Any awarded Performance Stock Units that do not vest in accordance with the PSU Vesting Criteria will be automatically forfeited, will revert to the Plan, and you will have no rights with respect to such forfeited Performance Stock Units.

3. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not be issued any shares of common stock in respect of your PSU Grant unless either (i) the shares of common stock are then registered under the Securities Act; or (ii) if the shares of common stock are not then so registered, the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your PSU Grant also must comply with other applicable laws and regulations governing your PSU Grant, and you may not receive such shares if the Company determines that such receipt would not be in compliance with such laws and regulations.

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4. DATE OF ISSUANCE.

(a) The Company will deliver to you a number of shares of the Company’s common stock equal to the number of Vested Units subject to your PSU Grant within thirty (30) days following the Committee’s determination that Performance Conditions have been satisfied and only if you remain in Continuous Service as an Employee, Director or Consultant through the Employment Vesting Date indicated in the Grant Notice. If a scheduled delivery date falls on a date that is not a business day, such delivery date will instead fall on the next following business day.

(b) Notwithstanding the foregoing, in the event that you are subject to the Company’s policy permitting officers and directors to sell shares only during certain “window” periods, in effect from time to time, or you are otherwise prohibited from selling shares of the Company’s common stock in the public market and any shares in respect of your PSU Grant are scheduled to be delivered on a day (the “Original Distribution Date”) that does not occur during an open “window period” applicable to you, as determined by the Company in accordance with such policy, or does not occur on a date when you are otherwise permitted to sell shares of the Company’s common stock on the open market, then such shares will not be delivered on such Original Distribution Date and will instead be delivered on the first business day of the next occurring open “window period” applicable to you pursuant to such policy (regardless of whether you are still providing continuous services at such time) or the next business day when you are not prohibited from selling shares of the Company’s common stock in the open market, but in no event later than the Final Issuance Date indicated in the Grant Notice. The form of such delivery (e.g., a stock certificate or electronic entry evidencing such shares) will be determined by the Company.

5. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents to be executed in the future in connection with your PSU Grant.

6. DIVIDENDS. You will receive no benefit or adjustment to your PSU Grant with respect to any cash dividend, stock dividend or other distribution that does not result in a capitalization adjustment as provided in the Plan; provided, however, that this sentence will not apply with respect to any shares of common stock that are delivered to you in connection with your PSU Grant after such shares have been delivered to you.

7. NON-TRANSFERABILITY OF THE PSU GRANT. Your PSU Grant is not transferable, except by will or by the laws of descent and distribution. In addition to any other limitation on transfer created by applicable securities laws, you agree not to assign, hypothecate, donate, encumber or otherwise dispose of any interest in any of the shares of common stock that may be issued to you in respect of the PSU Grant until the shares are issued to you in accordance with Section 4 of this Agreement. After the shares have been issued to you, you are free to assign, hypothecate, donate, encumber or otherwise dispose of any interest in such shares provided that any such

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actions are in compliance with the provisions herein and applicable securities laws. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, will thereafter be entitled to receive any distribution of common stock to which you were entitled at the time of your death pursuant to this Agreement.

8. RESTRICTIVE LEGENDS. The shares issued in respect of your PSU Grant will have endorsed thereon appropriate legends as determined by the Company.

9. PSU GRANT NOT A SERVICE CONTRACT. Your PSU Grant is not an employment or service contract, and nothing in your PSU Grant will be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your PSU Grant will obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.

10. WITHHOLDING OBLIGATIONS.

(a) On or before the time you receive a distribution of the shares in respect of your PSU Grant, or at any time thereafter as requested by the Company, you hereby authorize the Company to withhold shares of common stock from the shares of common stock issued or otherwise issuable to you in connection with the PSU Grant with a Fair Market Value (measured as of the date shares of common stock are issued to you pursuant to Section 4) equal to the amount of any federal, state, local and foreign tax withholding obligations of the Company or any affiliate which arise in connection with your PSU Grant (the “Withholding Taxes”); provided, however, that the number of such shares of common stock so withheld will not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum required statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income. Additionally, the Company may, in its sole discretion, satisfy all or any portion of the Withholding Taxes obligation relating to your PSU Grant by any of the following means or by a combination of such means: (i) withholding from any compensation otherwise payable to you by the Company; or (ii) causing you to tender a cash payment.

(b) Unless the tax withholding obligations of the Company or any Affiliate are satisfied, the Company will have no obligation to deliver to you any common stock.

11. UNSECURED OBLIGATION. Your PSU Grant is unfunded, and as a holder of a vested PSU Grant, you will be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares pursuant to this Agreement. You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this Agreement until such shares are issued to you pursuant to Section 4 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

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12. TAX CONSEQUENCES. You have reviewed with your own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. You are relying solely on such advisors and not on any statements or representations of the Company or any of its agents. You understand that you (and not the Company) will be responsible for your own tax liability that may arise as a result of your PSU Grant.

13. NOTICES. Any notices provided for in this Agreement or the Plan will be given in writing and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. Notwithstanding the foregoing, the Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this PSU Grant by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

14. MISCELLANEOUS.

(a) The rights and obligations of the Company under your PSU Grant will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by, the Company’s successors and assigns. Your rights and obligations under your PSU Grant may only be assigned with the prior written consent of the Company.

(b) You acknowledge and agree that you have reviewed your PSU Grant in its entirety and have had an opportunity to obtain the advice of counsel prior to executing and accepting your PSU Grant.

(c) This Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(d) All obligations of the Company under the Plan and this Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

15. GOVERNING PLAN DOCUMENTS. Your PSU Grant is subject to all the provisions of the Plan, including any limits on the number of shares that may be issued to you as set forth in Section 6(d) of the Plan, the provisions of which are hereby made a part of your PSU Grant, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be

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promulgated and adopted pursuant to the Plan. Except as otherwise expressly provided herein in the event of any conflict between the terms in the PSU Grant and the Plan, the terms of the Plan will control.

16. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid will, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

17. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the PSU Grant subject to this Agreement will not be included as compensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any affiliate’s employee benefit plans.

18. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement will be governed by the law of the state of Delaware without regard to such state’s conflicts of laws rules.

19. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by the Company by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. For the avoidance of doubt, nothing in this Section 19 limits the authority or power of the Compensation Committee to reduce the number of shares of common stock to be received as set forth in the PSU Vesting Criteria. Without limiting the foregoing, the Company reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable tax or securities laws or regulations or any future tax or securities law, regulation, ruling, or judicial decision.

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This Performance Stock Unit Agreement will be deemed to be signed by the Company and the Participant upon the signing by the Participant of the Performance Stock Unit Grant Notice to which it is attached in the manner permitted by Section 5.

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ATTACHMENT III

2007 EQUITY INCENTIVE PLAN

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ATTACHMENT IV

TREATMENT UNDER

[AMENDED AND RESTATED] EXECUTIVE OFFICER BENEFITS AGREEMENT

Upon the occurrence of a “Termination Upon Change in Control” (as defined in the Participant’s [Amended and Restated] Executive Officer Benefits Agreement), the Performance Stock Units will be treated as a “target bonus” under Section [4(a)(i)] of Participant’s [Amended and Restated] Executive Officer Benefits Agreement. For purposes of Section [4(a)(i)] of the Participant’s [Amended and Restated] Executive Officer Benefits Agreement, “target bonus” will be based on the Target Number of Performance Stock Units. The Performance Stock Units deemed vested pursuant to this paragraph will be paid in shares of the Company’s common stock equal to the number of Performance Stock Units deemed vested.

Upon the occurrence of a “Termination of Employment” (as defined in the Participant’s [Amended and Restated] Executive Officer Benefits Agreement), the Performance Stock Units will be treated as a “targeted annual incentive bonus” under Section [5(a)] of Participant’s [Amended and Restated] Executive Officer Benefits Agreement. For purposes of Section [5(a)] of the Participant’s [Amended and Restated] Executive Officer Benefits Agreement, “targeted annual incentive bonus” will be based on the Target Number of Performance Stock Units. The Performance Stock Units deemed vested pursuant to this paragraph will be paid in shares of the Company’s common stock equal to the number of Performance Stock Units deemed vested.

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