Restricted Stock Units

Definition

Restricted stock units (RSUs) are a form of equity compensation offered by companies to their employees, representing a promise to deliver shares of stock upon the fulfillment of certain conditions, such as continued employment or performance milestones. These units align the interests of employees and shareholders, providing a long-term incentive to enhance company performance while ensuring that employees have a vested interest in the company's future success.

5 Must Know Facts For Your Next Test

1. RSUs are typically granted to employees as part of their overall compensation package and have become increasingly popular due to their simplicity and alignment with shareholder interests.
2. Unlike stock options, RSUs have intrinsic value as they convert into actual shares of stock without requiring the employee to pay an exercise price.
3. RSUs usually have a vesting schedule that requires employees to remain with the company for a specified period or achieve performance targets before they can claim their shares.
4. When RSUs vest, they are considered taxable income based on the fair market value of the shares at that time, leading to potential tax implications for employees.
5. Companies often use RSUs as a retention tool to motivate employees to stay longer, as unvested RSUs can be forfeited if the employee leaves before they vest.

Review Questions

• How do restricted stock units serve as a tool for employee retention and motivation?
  • Restricted stock units encourage employee retention by tying ownership incentives to continued employment. As RSUs typically come with vesting schedules, employees must remain with the company for a specific period to earn their shares. This structure not only motivates employees to contribute positively to the company's performance but also creates a sense of loyalty, as leaving the company before vesting results in forfeiting unearned RSUs.
• What are the key differences between restricted stock units and stock options regarding their mechanics and impact on employee compensation?
  • The main difference between restricted stock units and stock options lies in how they provide value to employees. RSUs grant actual shares upon vesting without any purchase requirement, thus having immediate intrinsic value. In contrast, stock options require employees to purchase shares at a set price, which may be advantageous only if the market price exceeds this exercise price. This difference impacts how each form influences an employee's financial decision-making and their overall compensation experience.
• Evaluate the potential advantages and disadvantages of using restricted stock units as part of an executive compensation strategy within a corporation.
  • Using restricted stock units in executive compensation strategies presents several advantages. They align executives' interests with those of shareholders by incentivizing long-term company performance. Additionally, RSUs can help attract and retain top talent. However, there are disadvantages; for instance, they can create significant tax burdens for employees when they vest. Furthermore, if not designed carefully, they may lead to excessive risk-taking by executives seeking short-term gains at the expense of long-term stability.

Related terms

Vesting: The process by which an employee earns the right to receive shares of stock or options over time, often linked to continued employment or achieving specific performance goals.

Stock Options: A type of equity compensation that gives employees the right to purchase shares of the company's stock at a predetermined price, usually after a vesting period.

Equity Compensation: A method of rewarding employees with ownership interest in the company through various forms, including stock options, RSUs, and stock grants.