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Restricted Stock Unit Planning

If you are amongst the top talent where you work, you are either thinking of ways to increase your remuneration or are considering what other similar companies can offer you for your expertise. Well, employers know this too well. For this, they come up with compensation plans that entice their valuable employees to stick around for longer. One such plan is the Restricted Stock Units (RSU). What are restricted stock units and, are they worth your time in the company? Let's explore below:

Understanding Restricted Stock Units

Restricted Stock Units (RSUs) are additional compensation given to employees in the form of company stock. Corporations like Microsoft, Apple, and Amazon use RSU stock to attract and retain talented employees and executives. Note that the employees do not own the restricted stock units. Instead, it is a promise companies make to their employees to give them RSU stock upon completion of a set vesting period.

Key Benefits of Restricted Stock Units to the Employee

  • Depending on their value at the vesting date, RSUs can add up to a significant portion of your annual income
  • RSUs can grow your net worth substantially over time.

Restricted Stock Unit Planning Terms You Need To Know

  • Grant Date – The date when the employer awards the RSU to the employee
  • Vest Date – The date when the RSUs become available to the employee. At this time, the employee may sell, hold, or diversify the RSU stock.
  • Vesting Schedule – The graduated period when you can vest the shares. As an employee with RSU stock, you have to work with the company for the stipulated time as per the vesting schedule before you can purchase the shares. In turn, it prevents company losses due to employees who resign after a short time and end up with potentially valuable shares.
  • RSU Refreshers – Once you reach the end of the vesting schedule, and all your shares are vested, your employer may decide to give you an incremental grant to entice you further to extend your stay with the company. This incremental grant is the RSU refresh, also referred to as the golden handcuffs. It can arise at the end of your initial RSU plan or overlap it to extend it by some years.

Tax Implications

The vest date is the basis for calculating your tax liability arising from the RSU stock. Hence, should you opt to sell your shares, the market value of all your shares is treated as extra taxable income. It means the extra income shall be subject to payroll taxes and income tax.

Working with a Professional Advisor

Is your employer offering restricted stock units as part of your compensation plan? Should you hold, sell, or diversify? Well, unless you have some financial background, the jargon around how RSU stock works can be confusing. It is prudent that you work with a professional advisor such as GCD Advisors, who can elaborate on what you have and the best action you can take when handling your restricted stock unit planning.

As an experienced financial advisor, we can help you determine the implications of what you want to do when:

  • Holding, selling, or diversifying your RSU stock on the vest date
  • Leaving the company before the vesting date
  • Tax on cashing out your RSUs vs. selling them
  • Your company goes public through an IPO
  • Avoiding double taxation when selling a portion of your shares

Our main goal is to provide the best money management tips and investment management strategies to help you improve your financial wellbeing.

Restricted Stock Unit FAQs

  1. What is a stock option plan?

Most corporations offer employee compensation plans as RSUs or stock options. A stock option plan is an arrangement corporations make for their employees to purchase equity in the company at a determined price (strike price) within a specified window of time. Unlike RSU stock, the employee owns the shares offered in a stock option plan.

       2. Do I need a stock option plan?

Note that employees have no obligation to enter into stock option plans with their employers. Still, it can be a smart decision, considering that the strike price is usually a discounted version of the value of the stocks when hiring the employee. If the company is doing well, the stock prices shall rise, resulting in additional income for the employees when exercising their options.

       3. Which is better; RSU or stock options?

Choosing between RSU stock and stock options is a matter of personal preference. Ultimately, both employee compensation plans have their pros and cons as follows: 

  • Whereas RSU stock has no exercise price, stock options have an exercise price pegged on the market value of the equity on offer.
  • RSU payments can be in cash or stock. In contrast, payouts from stock options are in shares only.
  • Vested RSUs are treated as regular taxable income for that financial year or capital gains if held for more than one year. Non-qualified stock options (NSOs) are ordinary taxable income and incentive stock options (ISOs) are a preference item for alternative minimum tax(AMT) calculations. These AMT calculations can be complicated and are best left to a financial advisor.

Employees incur no cost when getting RSU stock. In turn, as long as the shares have a value, regardless of how low it is, RSU stock will always be a pure gain to the employees. In contrast, stock options are only valuable if the market value of the shares continues to appreciate after the grant date. That way, the employee will sell the shares at a higher price than the grant price. For this reason, many companies prefer offering fewer RSUs and more stock options to their top talents.

The Bottom Line

Most employees and executives receive RSU stock as part of their sign-out package or annual compensation review. If your employer gives you an RSU or stock option plan, and you have no clue what to do about them, contact us and we will guide you on everything you need to know.

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