RSU’s, or most commonly referred to as Restricted Stock Units have become a popular option for many companies, especially for those firms wishing to reward their company employees by giving them shares in the company to create ownership without having the administrative complexity of traditional stock option plans. Restricted Stock units have an advantage over stock options counterparts in the sense that it is nearly impossible for stock to be worthless, as it is for rights and options. Although, RSU’s and restricted stocks are similar in many factors, most employees chose and favor RSU’S for their benefit.
What is Restricted Stock Units (RSUs)?
RSU’s are similar to the stock options in some aspects, but what makes them different is these instruments are more versatile and often issued by employers in place of stock options in the current business environment. RSU’s offer no risk to employees and will expire worthless if the employee leaves the company before they are vested. Many employers like the way RSU’s are structured, because they do not have to track as much detail as with stock options. The fact they are issued to employees at no cost to the employees is a huge selling point for many employees. The employee knows they will make money unless the company goes out of business. This is also a valuable tool for employers, because the RSU’s act as a type of golden handcuff on their workforce. The amount of RSUs vesting for an employee could become such a large amount they would be hard pressed to find another job with such a high income in combination with their salary and vesting amounts each year.
Restricted Stock Units also help in terms of payroll processing, because they embody a promise by the company employer to pay the employee by giving them a set of number of company shares in the future upon the completion of the vesting schedule. In this process, the employee is therefore given an appropriate and exact numbers of units, representing as well her or his interest in the company stock. However, until the vesting is completed, there is no actual funding given. And thus, the assignment also of these stock units is simply a bookkeeping entry which has no tangible worth of any kind.
Usually, Restricted Stock Units (RSUs) have vesting schedules that are said to be identical or similar to shares that are restricted. In connection to that vesting schedule, they do not pay shares directly, but instead pay share equivalents that may be directed into an escrow account in order to help pay payroll tax or the company will reinvest these into the purchase of more company shares. When RSUs vest they are compensation expense to the employer and compensation to the employee. The employee’s W2 wage goes up by the amount of the RSUs vested, whether they cash them out or not by selling the stock. Many companies will automatically have a set percentage of RSUs sell to pay for the amount of taxes the RSUs have created by vesting for the employee. For example, if Ryan has $100000 worth of RSUs vest once a year, and those RSUs are equivalent to 1000 shares of stock worth $100 each currently, the company may automatically have 250 shares sold, which then goes to pay federal income taxes, social security, and Medicare tax. This leaves Ryan with 750 shares he may sell or not, depending on how he decides, but his W2 wage has went up by $100,000 for the year either way.
Restricted Stock Units (RSUs) and the Benefits
Foreign tax friendly
Most employees agree that RSU’ s are more beneficial than Restricted stock, because issuance of these to employees especially working outside the United States can make their payroll taxes easier due of the differences in how and when stock options are being taxed.
For employers, RSU’s incur lower/cheaper administrative costs, since there are no actual shares to track, record, and hold by them.
Rescheduling of share issuance
Another benefit is also, if you are the employer, you can issue RSU’s without diluting company shares. This is more beneficial over restricted stocks, but also in other forms of stock plans, including non-statutory and statutory stock option plans and stock purchase by the employee.
- There are no dividends
- No voting rights. RSU’s do not offer voting rights until actual vesting is complete.
The information given above is just some of the essential information employee and employer should further know about Restricted Stock Units (RSUs).