Check out this scenario: You have just received a job offer from the company of your dreams and you are currently weighing whether you should give it a go or not. While reviewing the lengthy job offer, you noticed a clause pertaining to Restricted Stock Units or RSUs as part of the deal. Do you know what restricted stock units are and how does it affect a potential job offer?
Read on and find out.
Technically speaking, a restricted stock unit is a part of a compensation package given by a company in the form of stock units. These are given based on a vesting plan, and a distribution schedule as agreed upon by both the employer and employee.
The Difference between Restricted Stock Units and Restricted Stocks
RSUs closely resemble restricted stocks, but these two are different in some major aspects. RSUs represent a company’s promise to an employee to distribute a number of shares based on tenure or on performance.
Unlike the holders of restricted stocks, employees who have RSU privileges do not have any voting rights during the vesting period, since no actual stock units are actually on hand.
Reason behind RSUs
Restricted stock units are offered by companies to potential employees as a way to ensure that their employees would give their best in performing their job functions. This, in turn, would greatly impact the performance of the company’s stock units. Moreover, this is also a way to secure the tenure of employees because RSUs are not given in full, but instead follows a distribution schedule.
What is a Distribution Schedule?
A distribution schedule is the schedule set by the company wherein the actual payment of the committed units is made to the employee.
What Happens to Restricted Stock Units Upon Vesting?
An employee’s right becomes non-forfeitable once the stock units committed by the company vest. Most of the time, the distribution schedule and vesting of RSUs are the same, given that the employee did not make arrangements to defer the distribution of units.
How are RSUs Distributed?
Upon acceptance of a job offer which includes restricted stock units, an employee will not be able to receive these units immediately. Instead, RSUs are distributed to employees based on a vesting plan, and a distribution schedule agreed upon by both the employee and employer. Normally, units are given upon achievement of a required milestone in terms of performance, or upon reaching the required tenure at the company.
Received stock units are considered as income, and are taxed accordingly. Once an employee receives RSUs, he may opt to keep it in his portfolio, or sell these units immediately.
Forfeiture of RSUs
As discussed earlier, employees will receive stock units based on a distribution schedule. If ever an employee decides to tender his resignation, remaining undistributed stock units will be forfeited and the employee would only be able to keep the previously distributed units.
Income Tax Treatment
Employees with this benefit don’t tax during the year of the RSU grant. Instead, they are taxed after the vesting period, or the actual time that he receives the restricted stock units according to the agreed distribution plan.
Taxation of RSUs
RSUs and restricted stocks are taxed differently, as compared to other stock options, more specifically compared to statutory or non-statutory employee stock purchase plans. RSU plans are not treated as capital gains, but considered as ordinary income.
For RSUs, the amount to be declared may be computed by considering the original price of the stock and its value upon the year of vesting. The difference must be declared by the employee as part of his income for that specific year.
What Happens to RSUs Upon Retirement or Disability?
If the restricted stock units were already vested upon the time of retirement or disability, this would be processed based on the standard plan rules. If the units are still unvested upon retirement or disability, processing guidelines would be dependent on the rules that were previously stated by the employer.
Having RSUs as part of compensation is good for both employees and employers. Because of this, employees are motivated to perform well and contribute to the company’s growth. Moreover, this is a guarantee or assurance for the employee, given the huge potential for additional income based on the company’s performance. Now that you know what restricted stock units are, it’s now time to look closely at the job offer you have received and accept it.