There are different ways an employee can be compensated for his or her time and efforts. One of the most common ways an employee might be compensated is with stock. In some cases, this may mean restricted stock units, which are usually shortened to RSU. What are restricted stock units, and how can you make sure that you manage them appropriately? Take a look at a few important points below.
An Overview of Restricted Stock Units
Restricted stock units, or RSUs, are a form of compensation issue to an employee by his or her employer. In addition to being compensated a salary, some employees may be given shares in the company. They are typically distributed to employees through a vesting plan or a distribution schedule. Typically, some employees have access to this compensation network, but not all of them. Then, employees may have to stay with the company for a certain amount of time before they are awarded full control of the stock units, typically in accordance with a vesting schedule. Then, when the restricted stock units vest, they are assigned a fair market value. A portion of the shares might be withheld by the company to cover any income taxes that might be assessed when the RSUs vest. Then, the employee is given control over the remaining shares, meaning that he or she can sell them or hold them at his or her discretion.
Advantages of RSUs
There are several major advantages that come from providing RSUs. First, they provide a major incentive for employees to stay with the company for a long time. Sometimes, employees are not given full control of their stock units until they have stayed with the company for a certain number of years. Therefore, the longer they stay with the company, the more compensation they receive.
Another major advantage of providing employees with RSUs is a major incentive for them to work harder on behalf of the company. When the company does better, their stock units go up in value, meaning their compensation goes up as the share price rises.
Furthermore, companies like issuing RSUs to employees because it can have an impact on their share price. Companies may be able to defer issuing shares until the vesting schedule is complete, which can delay the impact of share dilution.
Advantages of RSUs
Disadvantages of RSUs
Incentive to Stay: Rewards longer tenure as RSUs vest over time.
No Dividends: RSUs don’t provide dividends until allocated.
Performance Incentive: Boosts employee efforts for better company performance.
No Voting Rights: RSUs lack voting rights until fully vested.
Impact on Share Price: Delays share issuance to mitigate immediate dilution.
Forfeiture Risk: Leaving before vesting may lead to losing RSU shares.
Tax Implications: Transferable RSUs trigger income tax for employees.
Disadvantages of RSUs
On the other hand, there are a few drawbacks of RSUs. First, they do not provide employees with any dividends because the shares have not been allocated. An employer may provide dividend equivalents by placing money in an escrow account, but this is not necessarily required.
Until the shares are fully vested, RSUs also do not provide the holder with any voting rights. If an employee leaves before the vesting schedule is concluded, they may forfeit the portion of their shares back to the company.
Furthermore, when the RSUs become transferable on the vesting date, employees have to pay income tax on them. Some of the shares have to be withheld to cover income tax.
Colonial Stock Transfer Can Help You Better Understand RSUs
This is just a brief overview of restricted stock units. If you run a publicly traded company, you need to manage all of your paperwork appropriately. At Colonial Stock Transfer, it would be our pleasure to help you. We have a significant amount of experience working with companies across all industries, and we can help you manage stock options and SEC paperwork as well. Give us a call today to speak to a member of our team about how we can help your company.