The aim of this work is to provide a novel understanding of pseudoelasticity mechanisms in an FeMnSi-based shape memory alloy and to utilize the identified parameters to control and enhance the mechanical behavior of the alloy. The alloy was processed by employing caliber rolling to an equivalent strain of 0.25 at room temperature. Various heat treatments from 530 to 1000 °C were applied to study the microstructural evolution and pseudoelasticity behavior during short-term post-deformation annealing (PDA) and aging. A minimum residual strain of 2.85% was achieved after 4% loading in tension by annealing the cold-worked sample at 925 °C for 50 min followed by aging at 750 °C for 6 h; this is the lowest ever reported residual strain for this alloy. Moreover, the absorbed energy increased from 17 to 22 J/cm3, indicating a 30% enhancement compared with the as-received aged sample. These improvements in pseudoelasticity and absorbed energy make this alloy more suitable for seismic damping application by providing more recentering after energy dissipation. The improvements are mainly attributed to grain refinement, which stimulates a uniform distribution of precipitates inside the austenite grains after PDA and aging. Additionally, grain refinement modifies the morphology and size of precipitates, resulting in an increased number of stacking faults and a high volume fraction of ϵ-martensite, and diminishes the probability of the intersection of ϵ-martensite laths with each other and subsequent α′-martensite formation.