Restricted Stock Units (RSUs) are a form of compensation given by an employer to an employee in the form of company shares. RSUs are subject to a vesting schedule, which means the employee receives the stock only after certain conditions are met, such as length of employment or performance goals.
RSUs represent an employer's promise to give an employee a certain amount of shares in the company stock, pending the fulfillment of vesting conditions. Unlike stock options, RSUs have value even if the stock price decreases, as employees are granted actual shares, not just the option to buy them. Upon vesting, the value of the RSUs is considered taxable income, often with tax withholding occurring automatically.
For example, a company might grant an employee 100 RSUs that vest over four years at 25% per year. Therefore, after the first year, the employee receives 25 shares, another 25 shares after the second year, and so on. The employee benefits from any appreciation in the stock price that occurs during the vesting period.
Why It Matters
RSUs are crucial for HR professionals as they play a significant role in attracting and retaining talent. As part of a compensation package, RSUs can make an employment offer more compelling. For employers, RSUs provide an incentive structure that aligns the employees' interests with that of the company—encouraging staff to focus on long-term company performance. For employees, RSUs represent potential wealth accumulation through the rise of the company’s stock price, offering a source of financial growth beyond regular salary.
FAQ
How are RSUs taxed?
RSUs are taxed as income once they vest and convert to shares of stock. This value is typically reported as ordinary income and is subject to payroll taxes. Often, employers will withhold a portion of the RSUs to cover the tax burden, providing the employee with the remaining shares.
What happens to RSUs if I leave the company?
If you leave the company before the RSUs are fully vested, you typically forfeit any unvested portion. However, some companies have policies in place for accelerated vesting in specific situations such as retirement, disability, or a change in company control.
Can RSUs lose value?
RSUs themselves do not decrease in value, as they are not options. However, the value of the shares upon vesting can fluctuate based on the company’s stock price in the market. While RSUs always have some value unless the stock price drops to zero, their worth is directly proportional to the company’s stock performance at the time of vesting.
What is the difference between RSUs and stock options?
RSUs grant actual shares in the company at no cost to the employee once they vest, while stock options give the employee the right to purchase company stock at a set price after vesting. Unlike options, RSUs have value without the need for the stock price to exceed the grant price, making them less risky in declining markets.