Job seekers and employees looking for employment opportunities often hope to obtain extra benefits from companies beyond a living wage, health insurance, and a retirement option. Restricted Stock Units (RSUs) are one of the most popular incentives offered by employers to obtain new talent, prevent employee attrition, and reward excellent performance.
This beginner’s guide outlines important facts about RSUs. Read on to learn more.
What Are Company RSUs?
Companies promise RSUs to new and current employees as a “right” to receive equity ownership or financial interest without immediately owning stocks. An employee must fulfill certain requirements. For example, they might need to work for the company for a specific time frame or reach a specific performance achievement. They can then keep or sell the stock. At that point, all common stock advantages, disadvantages and rules apply to their situation.
Why Do Companies Offer RSUs?
Employers use RSUs to attract, cultivate and maintain top talent. This type of incentive or reward requires no immediate payout. An employer doesn’t have to worry about the loss of this part of their investment in a worker. They’ve essentially only made a “promise to pay” agreement. Additionally, RSUs prompt employees to perform well at all times to help their employer thrive and succeed. If the company performs well, then they eventually receive high-value stocks.
How Are RSUs Fulfilled?
Since a worker with an RSU agreement only receives an intangible promise, they can’t access the fair market value of their shares via ownership or cash equivalent until they fulfill their obligations. Their employer gives them specific dates across an agreement period known as a vesting schedule. For example, a company might offer 1,000 shares to a new hire over a four-year vesting schedule with 250 shares transferred for ownership at the end of each completed year of employment.
Primary Advantages of RSUs
After the transfer of ownership on an RSU vesting date, an employee must count the value of their shares as part of their gross income for tax purposes. Companies typically withhold the equivalent value of the taxes during normal withholding or allow their employees to pay out of pocket.
Beyond owning potentially high-valued stock, an employee benefits from their RSU agreement in many other unique ways. They can count it as a capital gain. They can use the value to calculate their income at a higher level that might make it possible for them to acquire non-company benefits via a lender, such as a personal loan or refinanced mortgage. They can reinvest in other stocks. If they want tax-deferred advantages, they might set up a retirement or savings account.
Biggest Disadvantages of RSUs
The employee doesn’t initially receive any dividends, value or voting rights. They must wait to receive all of these benefits on the vesting date. Companies that require overtime and do not credit employee’s overtime hours towards their RSU vesting may be undercalculating employee’s compensation. Another big downside to RSUs is that a worker might have to pay more taxes than expected when their shares vest. They might discover to their surprise that they’ve been bumped into a higher tax bracket. The new income level might decrease the previously expected amount of a refund or cancel it out entirely.
If a company goes through a merger, acquisition or initial public offering event, a worker might receive all the shares before the end of the vesting schedule or none at all. If they decide to switch jobs and leave the company before they fulfill some or all of their obligations during the vesting schedule, they lose future ownership of the shares. Depending on the terms they agreed to with their former employer, they might even need to sell previously transferred shares back.