Restricted Stock Units

Updated on April 4, 2024

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.

Restricted Stock Units

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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.

Key Takeaways

  • 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.

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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:

  1. Withhold to cover – Under this scheme, the company can withhold a few of the vested sharesVested SharesShares vesting refers to the grant of shares over a pre-decided tenure as the compensation package or contribution towards the pension scheme to the employees or to the founders of the company to reward them for their work performance and to retain them for longer years in the company.read more to the employee to pay the applicable taxes.
  2. Cash payments – The employees may have the option to pay the taxes directly to their companies through payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more or check, and the employees can have their accounts credited with the full number of vested shares.
  3. 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:

ProsCons
Taxed lenientlyGives no voting rights, normally
Keeps employees motivatedNo dividends are offered in normal cases
Rewards their loyalty and recognizes their effortsIf 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:

CategoryRestricted Stock UnitsStock Options
Exercise priceNoneConcerning the total market value of the underlying securities
Mode of paymentCash or stocksStocks only
Voting rights/DividendsNormally no. However, it might be applicable if the company finds it suitable.Upon exercise
Popular inMature firmsGrowing companies

Frequently Asked Questions (FAQs)

Are restricted stock units taxable?

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.

Can you sell restricted stock units?

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.

Are restricted stock units good?

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.

This article has been a guide to what are Restricted Stock Units. Here, we explain its taxation, example, pros & cons, and differences with stock options. You may also find some useful articles here:

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