Restricted stock units

Definition

Restricted stock units (RSUs) are a form of compensation given to employees in the form of company shares, which are subject to vesting conditions. These units are typically granted as part of an employee's compensation package and are designed to align the interests of employees with those of shareholders by incentivizing long-term commitment to the company. RSUs become actual shares once certain conditions, often related to time or performance, are met, allowing employees to realize their value.

5 Must Know Facts For Your Next Test

1. RSUs are typically used by companies to attract and retain top talent, especially in competitive industries.
2. Once vested, RSUs are taxed as ordinary income based on the market value of the shares at the time of vesting.
3. RSUs can be an effective way for companies to motivate employees since their value increases with the company's stock price.
4. Unlike stock options, RSUs have intrinsic value even if the company's stock price drops because they do not require employees to purchase shares.
5. The number of RSUs granted and the specific vesting schedule can vary widely among companies and individual employee agreements.

Review Questions

• How do restricted stock units serve as an incentive for employee performance and retention within a company?
  • Restricted stock units incentivize employees by tying their potential earnings directly to the performance of the company's stock. By granting RSUs that vest over time or upon meeting specific performance milestones, companies encourage employees to stay with the organization longer and work towards its success. This creates a sense of ownership among employees, motivating them to contribute positively to the company's growth and stability.
• Discuss the tax implications associated with restricted stock units once they vest and how this affects employee decision-making regarding their stock.
  • When restricted stock units vest, they are taxed as ordinary income at their market value at that time. This tax burden can influence employees' decisions about when to sell their shares, as they may want to wait for a higher market price to maximize their after-tax returns. Additionally, understanding the tax implications can help employees strategize their financial planning and minimize tax liability through effective timing of stock sales.
• Evaluate how restricted stock units compare to other forms of equity compensation, such as stock options and performance shares, in terms of employee motivation and retention strategies.
  • Restricted stock units offer distinct advantages over other equity compensation forms like stock options and performance shares. Unlike stock options, which may become worthless if a company's stock price falls below the exercise price, RSUs have inherent value upon vesting regardless of market conditions. This makes RSUs a more secure form of compensation for employees, likely enhancing motivation and retention. Performance shares also align with corporate goals but depend heavily on achieving specific targets; RSUs may provide broader incentives by rewarding loyalty and long-term commitment without stringent performance metrics.

Related terms

vesting: The process by which an employee earns the right to receive benefits or shares over time, contingent on meeting certain conditions.

equity compensation: A form of non-cash pay that represents an ownership interest in the company, often provided through stocks, options, or RSUs.

performance shares: A type of equity compensation that grants shares based on the achievement of specific performance goals.