Decoding Restricted Stock Units (RSUs)
Ever wondered if there was a way to directly share in the rewards of your hard work and dedication as your company grows? If you could see your efforts reflected not just in your paycheck but also in the value of a stake you hold within the organisation. That's the power of restricted stock units (RSUs).
RSUs are like rewards you earn over time that give you ownership in the company. The better the company does, the more valuable your RSUs become. This creates a win-win situation; you are motivated to go the extra mile, and the company benefits from your dedication.
In this article, we discuss RSUs, explaining how they work and why they can be a great part of your compensation package. We will also compare them to other stock options so you can make informed decisions about your career.
What are restricted stock units?
Restricted stock units are a type of compensation where employees are promised actual shares of company stock in the future. You earn ownership of these shares gradually over time, following a schedule called vesting. RSUs are a way for companies to reward employees for staying with them and helping the company grow.
The major difference between the meaning of RSUs and owning stock outright is that you don't have to pay anything upfront for RSUs. The company gives them to you as part of your compensation. You only pay taxes and get full ownership of the shares once they have vested.
Why do companies use restricted stock units?
Now that you are familiar with RSU’s meaning, let us take a look at its key benefits:
- Alignment of interests: RSUs make employees feel like they own a part of the company. This makes them want to work harder because they want the company to do well.
- Retention: RSUs often have rules that make employees wait a few years before getting the shares. This makes employees more likely to stay with the company for a long time. When people stay longer, the company has a stable team, which helps it succeed.
- Attracting talent: Offering RSUs is a good way to get talented people to work for the company. It shows that the company values its employees and wants to reward them for their work.
- Cost-effectiveness: RSUs can be cheaper for a company compared to other types of stock rewards like stock options. With RSUs, the company gives actual shares to employees, so it is clear how much it costs. With stock options, the cost can change because it depends on the stock price.
Also read: Undervalued stocks
RSUs vs other forms of share-based compensation
RSUs and stock options are ways companies can give their employees shares of company stock as part of their compensation. However, they differ in certain aspects:
Stock options: These give employees the right to buy company stock at a set price within a certain time. But employees have to pay that price to get the stock. If the stock price increases significantly, employees can make a good profit. But if the stock price goes down, the options might not be worth anything.
RSUs: These give employees shares of company stock for free as long as they meet certain requirements. The number of shares is based on the stock's value when they "vest," which means when they are officially owned by the employee.
Other types of share-based compensation include restricted stock, which is like RSUs but usually vests all at once, and performance shares, which are given based on meeting specific goals.
So, RSUs give you shares without needing to pay, while stock options let you buy shares at a fixed price, with the risk that they might not be worth anything.
Example of how RSUs work
- Let us walk through a simplified example to illustrate how RSUs work:
- Let us say your company gives you 100 RSUs, and they vest over 4 years.
- At the start, the company's stock is valued at Rs. 20 per share.
- Every year, 25 RSUs become yours. So after the first year, you own 25 shares valued at Rs. 20 each, totalling Rs. 500.
- This repeats for the next 3 years until you own all 100 RSUs.
Tax implications of RSUs: When your RSUs vest, you will be taxed on the fair market value of the shares at that time. The company will typically withhold taxes from your vested shares to simplify the process.
Also read: Stock split
Risks and considerations with RSUs
RSUs provide good benefits, but they are not without their drawbacks. Unlike stock options, they don't offer big gains if the stock price increases. The value of RSUs can change with the market, so there's some risk.
However, for many employees, the fact that RSUs guarantee ownership and have a predictable value is more important than these drawbacks. Knowing the good and bad sides of RSUs helps you decide if they are right for your compensation and career goals.
Conclusion
Restricted stock units aren't just a way to pay employees; they connect how hard employees work with how well the company does. RSUs make employees feel like they own a piece of the company, so when the company does well, they do, too. This motivates the employees and helps everyone succeed together.
Knowing about RSUs can help you make smart career choices and maybe even lead to a future where you are more involved in the company's success, both financially and in terms of your role.
