Restricted stock units (RSUs) are a type of pay that firms regularly use to reward employees. RSUs are a promise by the employer to issue the employee a particular number of shares of company stock at a later date, usually subject to the satisfaction of certain criteria, such as continuing working with the company for a defined amount of time.
How RSUs Work
- Grant: When employees receive RSUs, they do not own the stock outright. Instead, they receive a promise from the employer to deliver the shares at a later date, commonly referred to as the vesting date.
- Vesting: RSUs typically vest over time, which means the employee obtains ownership of a portion of the RSUs on a set schedule. Vesting schedules can be established based on years of service, performance objectives, or other variables.
- Settlement: Once the RSUs have vested, the employee receives actual shares of company stock. At this stage, the employee can choose whether to keep the shares or sell them.
Benefits of RSUs
- Retention Incentive: RSUs are an effective retention tool because they motivate employees to stay with the company until the RSUs vest, so aligning their interests with those of the company and its shareholders.
- Performance Alignment: RSUs frequently tie employee remuneration to the company’s performance, instilling a sense of ownership and encouraging employees to contribute to the company’s long-term success.
- Tax Deferral: Unlike stock options, RSUs do not obligate the employee to buy the shares at a specific price. As a result, taxes are postponed until the shares vest, at which point they are classified as ordinary income.
Considerations and Risks
- Market variations: Because the value of RSUs is related to the price of company stock, variations in the stock price might have an impact on the RSU value.
- Tax Implications: Once vested, RSUs are subject to ordinary income tax and, potentially, payroll taxes. Employees should be aware of the tax implications and prepare properly.
- Forfeiture Risk: If an employee quits the company before the RSUs vest, they may lose all or a portion of their RSUs, depending on the terms of the grant agreement.
Conclusion:
Restricted stock units are an important component of employee compensation packages because they give employees a stake in the company’s success and encourage them to contribute to its growth and profitability. Employees who understand how RSUs function, as well as the related rewards and risks, can make more educated decisions regarding their financial future and long-term career objectives.
