Restricted stock units

Definition

Restricted stock units (RSUs) are a form of equity compensation awarded to employees, representing a promise to deliver shares of the company's stock at a future date, usually subject to vesting conditions. RSUs are designed to align the interests of employees with those of shareholders, encouraging long-term commitment and performance. As these units vest, employees gain full ownership of the shares, which can lead to potential financial gains as the company grows.

5 Must Know Facts For Your Next Test

1. RSUs are considered a form of deferred compensation since they do not provide immediate ownership of shares until they vest.
2. The value of RSUs is tied directly to the company's stock price, meaning employees can benefit from increases in share value after vesting.
3. Upon vesting, RSUs are typically subject to income tax as ordinary income based on the market value of the shares at that time.
4. Companies often use RSUs as a retention tool, encouraging employees to remain with the company until their units vest.
5. Unlike stock options, RSUs always have value when they vest, even if the stock price drops, making them less risky for employees.

Review Questions

• How do restricted stock units (RSUs) serve as a motivation tool for employees?
  • Restricted stock units (RSUs) motivate employees by aligning their interests with those of shareholders. By granting shares that vest over time, employees are encouraged to focus on long-term company performance and stability. This connection between employee rewards and company success can lead to improved productivity and loyalty among staff, ultimately benefiting both parties.
• Discuss the tax implications of receiving restricted stock units upon vesting compared to other forms of equity compensation.
  • When restricted stock units vest, they are taxed as ordinary income based on their market value at that time. This differs from stock options, which are typically taxed only when exercised. Because RSUs always have value when they vest, employees may face a significant tax liability regardless of the stock's future performance. Understanding these tax implications is crucial for employees receiving RSUs as part of their compensation package.
• Evaluate the advantages and disadvantages of using restricted stock units as part of an executive compensation package in terms of retention and performance incentives.
  • Using restricted stock units in executive compensation packages has both advantages and disadvantages. On one hand, RSUs promote retention by encouraging executives to stay with the company until their units vest. They also provide a strong incentive for executives to drive company performance since their wealth is directly tied to share price. However, one disadvantage is that if stock prices decline after vesting, executives may receive substantial financial rewards while failing to improve company performance. This disconnect could lead to misalignment between executive actions and long-term shareholder interests.

Related terms

vesting: The process by which an employee earns the right to receive full benefits from stock options or RSUs over time, often contingent on continued employment or meeting performance goals.

stock options: A form of equity compensation that gives employees the right to purchase shares of the company's stock at a predetermined price within a specific timeframe.

equity compensation: A non-cash payment used to reward employees, typically involving stocks or stock options, aimed at attracting and retaining talent while motivating employees to contribute to the company's success.