Restricted Stock Units (RSUs)
Working for a company that is doing well is not only great for self promotion but is also great purely for the compensation itself. Restricted stock units help companies influence their employees to work harder and more efficiently, and in doing so, helps to increase overall productivity. Here is how this process works and why you should be aware of it:
Definition:
RSUs represent a promise by the Company to issue shares of its common stock in the future when you satisfy the criteria applicable to your RSU award.
During the vesting period, the employee typically does not own the stock outright; instead, they have a "restricted" interest in the stock, meaning they cannot sell or transfer it until the vesting conditions are met.
What is Vesting?
RSUs usually vest over a set period of time or upon the achievement of certain performance goals. Once the RSUs vest, the employee receives the shares of stock, which they can either keep or sell.
Employee Retention and Motivation:
RSUs are used by companies as a tool to attract and retain talented employees. By offering RSUs, companies provide employees with a stake in the company's performance and success, aligning their interests with those of the shareholders.
Performance Alignment:
RSUs can also be structured to vest based on the company's performance metrics, such as achieving revenue targets or stock price milestones. This helps ensure that employees are motivated to contribute to the company's growth and success.
Long-Term Perspective:
Since RSUs typically have a vesting period, they encourage employees to take a long-term view of the company's performance and stock value. This can help foster a culture of commitment and stability within the organization.
Tax Considerations:
RSUs are subject to taxation upon vesting. When RSUs vest, the value of the shares is considered taxable income to the employee at that time, based on the fair market value of the stock. This means employees need to plan for the tax implications of receiving RSUs.
Example:
You were granted 100 RSUs on December 8, 2017, which are scheduled to vest 100% on December 8, 2020. On March 15, 2018, you meet the retirement conditions and therefore, you are entitled to keep your entire award if you were to retire. At that time, the fair market value of our common stock was $80.00. You did not retire on March 15, 2018, and thus your RSUs remain unvested and no shares have been issued to you. Consequently, U.S. tax rules do not require you to recognize any income for income tax purposes in connection with your retirement eligibility status on March 15, 2018. However, you will be required to recognize income for employment tax purposes. Assuming that employment taxes are remitted at the time you become eligible to retire and you are subject to the maximum federal employment tax rate of 7.65% at that time, you would owe approximately $612 in employment taxes.
Overall, RSUs are a valuable component of compensation packages for employees, providing them with an opportunity to share in the success of the company and aligning their interests with those of the shareholders. They also serve as a powerful tool for companies to attract and retain talent while fostering a long-term perspective and commitment among employees. If you have any more questions about how you can utilize RSUs or anything else like it, please feel free to call or email at (615) 844-3398 or Jim.Maddux@raymondjames.com.
Disclosure:
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
