Business

What Are Restricted Stock Units?

As an employee, there are a variety of different ways in which you can be compensated besides the conventional pay-packet. Different firms choose to offer these compensation benefits either as a standard practice to every employee, or they may be offered to select categories.

These benefits are sought after and appreciated based on whether you want or need such a category of compensation and the short- or long-term advantages it offers you and your family.

Typically, employers provide benefits such as:

  • Medical, disability and life insurance
  • Retirement plans
  • Work-related benefits such as flexible working hours, leave, up-skilling, training, work-place facilities including gyms, swimming-pools, games/sports/leisure venues, gifts, activities
  • Wellness and health benefits such as medical treatments, counseling, physiotherapy
  • Financial benefits such as stock options and shares
  • Personal finance advice, soft loans
  • Lifestyle benefits such as child-care, shopping, legal advice or work-from-home

Different age-groups of employees seek different categories of benefits. Baby-boomers typically look for pension plans, insurance, healthcare and leave, while millennials prefer to focus on working hours and health care besides skills development.

Generations X and Z give low priority to pension, but focus on working hours and leave. Pension plans become more important as people age and while looking for perks and benefits, younger age groups may have different preferences.

Restricted Stock Units

The restricted stock units (RSU) option is usually offered as a supplemental compensation in your total benefits package. Most commonly this is an option offered to new hires as either a hiring bonus, on-boarding reward, to supplement your compensation package, or non-qualified retirement benefits that you may have forfeited when you left your previous employment.

Stock options in start-ups and those given to venture capital funders are intended to prevent abandonment of support to the venture. In some cases, the buyer of a company may award RSU in the firm as part of a non-competition clause.

Also known as restricted securities, RSU’s:

  • are a stock-based employee compensation
  • used to be commonly issued at director or senior executive level, but today, they are offered at lower levels too
  • are stocks in a company that are not completely transferable till certain pre-determined conditions are fulfilled
  • are issued based on conditions such as a defined period of continuous employment, earnings-per-share, financial performance etc
  • are issued to the employee through a vesting plan (having rights to a present/future payment/asset/benefit) that can be monetized/transferred upon certain parameters
  • the fair market value is assigned only after vesting
  • are considered to be income upon vesting and a part may be withheld to pay income-tax
  • upon vesting, employee is free to sell or retain the shares
  • always worth something, even if the company’s stock plummets
  • are usually received into your possession only after the vesting period is complete. Till then you don’t have voting or dividend rights
  • taxation comes into play when the RSU’s come into your possession
  • the taxable income is based on the market value of the shares at the point of vesting
  • your company may suggest different ways to pay taxes or it may have a single mandated method for all employees
  • you can also sell your shares back to the company
  • capital gains or any appreciation over market price has to be paid

Restrictions on RSU’s include those limits placed on the time that the stocks are held locked, certain milestones that the beneficiary must pass such as performance, age or number of years of employment with the company, or all these limits may be imposed while the RSU’s are given to the employee.

The vesting schedule may be in the form of a graded schedule where the grant is given in a calibrated or graded schedule. Or it may be in the form of a cliff schedule where you get the entire stocks when the conditions are fulfilled.

In case of job termination, the vesting process also comes to a stop.  However, if the employee suffers disability or death, or comes up for retirement, the terms of the plan will apply.

Benefits of RSU’s

RSU’s are an attractive option for several reasons.

1. Motivation: Owning stocks makes employees feel that they are a part of the organization. They begin to think and behave like “owners” and it increases their loyalty to the firm. It also motivates them to increase productivity and help the company to grow. Owning RSU’s promotes company loyalty and are used to attract, retain and motivate key employees who are given this option.

2. Value: RSU’s retain some value even if the company’s shares tank on the stock market. They are also easier to value by a simple calculation. This gives you an idea of how much your RSU’s are worth at every stage.

3. Clarity: Employees who receive RSU’s are clear on when their vesting schedule would be completed. This means that you can plan different financial strategies for your stock, do your tax planning and investment planning around this date. Based on your personal attitude towards risk, and the company’s fluctuations on the stock exchange, you may find it more appealing.

4. Convenience: You can avoid making periodic and critical decisions because most of these are made by the vesting schedule itself. The market value and tax withholding happen automatically and you’re well prepared for these. However, you must take the time to understand how much stock you hold, for what period they’re restricted and how you will tackle the tax and cash-flow issues when you finally receive control.

5. Dividends: In contrast to stock options that don’t usually carry equal dividend rights, holding RSU’s entitles you to receive dividends whenever they’re paid out provided you meet the vesting conditions. These dividends will be reported as wages on your W-2 if you’re not eligible to meet the required criteria. You may also be able to designate a beneficiary who is entitled to receive these shares if you die before you receive them yourself.

RSU’s are a relatively uncomplicated and straightforward benefit compared to many other types of compensation in the form of equity. They can grow without much effort on your part, provided your company’s stock grows and remains healthy.

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