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What Are Restricted Stock Units?
Restricted Stock Units (RSU) are reward schemes under which the companies offer stock shares to honor the efforts and dedication of loyal employees. However, not all employees are found eligible for this reward program. They must fulfill a set of criteria to enjoy considerable rights to exercise stock shares ownership.
RSU is a form of compensation to the employees who work for a long term for the companies and devote themselves to the objectives the employers aim at achieving from time to time. This program acts as a booster for them and ensures loyalty from the employees' end.
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- Restricted Stock Units (RSU) can be defined as stock-based compensation issued as the company’s stock to an employee. However, this type of grant is limited and is subject to a vesting schedule.
- The company establishes vesting requirements based on an individual’s performance and employment length.
- RSUs are considered a total amount stock grant as the grant is worth the full value of the shares at the time of vesting.
- It is opted for by mature companies that have crossed their nascent stage.
Restricted Stock Units Explained
Restricted stock units are stock benefits that employers offer to their most loyal employees. It is a reward for the hard work they do and the efforts they put in. Though firms grant the employees the right to access the stocks, they do not issue them right from the grant date. Instead, the employers issue the stocks to the employees only when they satisfy the vesting requirements. For example, even when several shares are assigned to an employee, they cannot exercise their right over them if they do not fulfill the specific criteria.
The RSUs work on the grant and vested dates, two entirely different terms. The company provides RSUs to its loyal employees on the grant date. However, they can neither sell nor transfer them until they fulfill the required criteria. On the other hand, once the vested requirements are met, the company allows and offers complete access to these stocks, and the holders can sell or transfer them per their wish. The date when the employees get the opportunity to exercise their rights is referred to as the vesting date.
Unlike stock options, RSUs do not result in any loss, who means the outcome will always lead to some income even though the market price drops. Some restrictions make the RSUs restricted assets for employees. These restrictions are either time-bound (for a specific term), milestone-based (depending on the performance or achievements), or both.
Restricted Stock Units Video
Example
Let us understand the meaning of restricted stock units through the example below:
Patrick cracks a job as an investment banker in one of the most reputed banks in the region. The employer feels that his skills would help the company grow; hence, it offers him 600 RSUs along with other benefits to keep him motivated.
The company's shares traded at a market price of $50 per share, making them worth more than $30,000. Furthermore, the company promised that Patrick would be eligible for 20% of the total RSUs at the end of the first year of employment, 20% in the second year, and so on. In addition, the firm made him eligible for $30,000 as an incentive if he would serve the firm for five years.
This is how the restricted stock units plan keeps employees motivated and encourages them to stay with the company for longer.
Taxation
While accounting for restricted stock units, taxation is a major concern. As soon as the employees meet the vesting requirements, the stock units become taxable. Moreover, when it comes to the taxation of RSUs, there are three options that employees come across:
- Withhold to cover - Under this scheme, the company can withhold a few of the vested shares to the employee to pay the applicable taxes.
- Cash payments - The employees may have the option to pay the taxes directly to their companies through payroll or check, and the employees can have their accounts credited with the full number of vested shares.
- Sell to cover - As the name suggests, the employees, in this case, choose to sell the vested shares to pay the applicable taxes.
Pros & Cons
The RSUs have advantages and disadvantages, which employers and employees must know. So, let us have a quick look at them:
| Pros | Cons |
|---|---|
| Taxed leniently | Gives no voting rights, normally |
| Keeps employees motivated | No dividends are offered in normal cases |
| Rewards their loyalty and recognizes their efforts | If employees leave midway, i.e., before the vesting period, they will forfeit the remaining shares |
| Encourages them to a long-term association | |
| Taxes can be deferred by delaying the issuance of stocks. |
Restricted Stock Units vs Stock Options
RSUs and stock options are two terms that define the available alternatives for employers to choose from for their employees.
RSU is the promise from the employers that the eligible employees would receive the value of a specific number of shares on fulfilling the vested requirements. On the other hand, through stock options, the employers offer their employees the right and allow them to buy company stocks at a future date and price valid when it is issued.
Some of the differences between the two have been listed below:
| Category | Restricted Stock Units | Stock Options |
|---|---|---|
| Exercise price | None | Concerning the total market value of the underlying securities |
| Mode of payment | Cash or stocks | Stocks only |
| Voting rights/Dividends | Normally no. However, it might be applicable if the company finds it suitable. | Upon exercise |
| Popular in | Mature firms | Growing companies |
Frequently Asked Questions (FAQs)
The RSUs, as stated above, are taxable upon exercise. As soon as the vesting requirements are fulfilled, the companies issue the stocks or cash to the employees. This is when the RSU receivables become taxable. The taxes, however, can be deducted either by withholding the stocks or selling the stocks, or making cash payments in full.
Yes, the employees are free to sell the RSUs but only beyond the vesting period. When the companies grant or assign stock units to their employees, it is in the grant period. The employees must fulfill the vesting requirements to qualify for the right over the stocks. On completion, they gain the right to the RSUs, so they can sell them.
Of course, the RSUs are good and worth it as they boost employee morale. It is a reward program that pays employees for their effort and earns them recognition. When the employees are appreciated by their employers, they feel encouraged and motivated, thereby performing in the best way possible to be more and more productive.
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