Restricted Stock Units (RSUs) are a form of compensation commonly used by companies to reward and incentivize their employees, particularly those in higher positions such as executives and key employees. RSUs represent a promise to grant an employee a certain number of shares of company stock, typically the company’s common stock, at a future date, subject to certain conditions and restrictions.
Here’s how RSUs typically work:
1. Grant: When a company wants to grant RSUs to an employee, they issue a formal grant agreement. This agreement specifies the number of RSUs awarded to the employee.
2. Vesting: RSUs often come with a vesting schedule, which is a predetermined timeline over which the RSUs become eligible to be converted into actual shares of company stock. The vesting period can range from a few years to several years and is often subject to conditions, such as continued employment or meeting performance targets.
3. Conversion: Once the RSUs have vested, they are typically converted into actual shares of company stock at a one-to-one ratio. The employee now owns these shares and may do with them as they please.
4. Taxes: When RSUs vest and are converted into shares, employees may be subject to taxes, such as ordinary income tax, depending on the value of the shares at the time of conversion. Companies often withhold shares to cover these tax obligations.
RSUs have several advantages for both employees and employers:
1. Retention: RSUs can help retain key employees because they provide a strong incentive to stay with the company until the RSUs vest.
2. Performance Alignment: RSUs can align the interests of employees with those of the company’s shareholders, as the value of the RSUs is tied to the performance of the company’s stock.
3. Simplicity: RSUs are relatively simple for employees to understand, as they don’t require employees to purchase shares of company stock.
4. Stock Ownership: RSUs grant employees actual ownership of company stock, allowing them to benefit from any potential stock price appreciation.
It’s important to note that RSUs are different from stock options. Stock options give employees the right to purchase shares at a predetermined price (the exercise price), while RSUs grant actual ownership of shares once they vest.
The tax treatment of RSUs can vary by country and depends on specific circumstances. Employees should consult with tax professionals or their employer’s HR department to understand the tax implications of RSUs in their specific situation.