Restricted Stock Unit - Explained
What is a Restricted Stock Unit?
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Table of ContentsWhat is a Restricted Stock Unit?How is a Restricted Stock Unit Used? Limitations of Restricted Stock UnitsExamples of RSUsAcademic Research on Restricted Stock Units
What is a Restricted Stock Unit?
A restricted stock unit (RSU) is a restricted security or lettered stock that a company issues to its employees as a form of compensation. Restricted stock units can also be described as a promise by an employer to an employee that some shares of the company's stock would be issued to such employee on a future date.
Restricted stock units are issued based on an agreement that certain requirements will be met by an employee, employees who achieve the set performance goals can receive RSUs through a vesting plan on a predetermined date. RSUs cannot be used by employees until they are fully vested by the employer. After they are vested, employees can use the stock units for tax purposes and trade with them.
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How is a Restricted Stock Unit Used?
The popular usage of the restricted stock came as a result of the regulation of the Financial Accounting Standards Board (FASB) in 2004 that all companies should book an accounting expenditure for stock options which are issued. RSU as an employee-compensation plan become widely adopted by employers after the occurrence of accounting scandal in the mid-2000s.
Before the accounting scandals that involved big companies in the United States, stock options were used as vehicle of choice, but after the scandal erupted, stock units were used as compensation for employees and an effective way to attract impactful employees. This opened way for stock units being awarded to employees at all levels and not just executives of those that occupy top executive positions.
The advantages of restricted stock units are listed below;
- Through the issuance of RSUs, employees are encouraged to stay longer with an employer and contribute significantly to the growth of the company.
- RSUs incentivize employees an aid a better performance.
- RSUs create opportunities for additional stream of income for employees who are faithful to their employees and perform well.
- RSUs is a strategy used by companies to defer the dilution of their shares, this is because employees cannot trade with or use RSUs until the vesting schedule has been completed.
Limitations of Restricted Stock Units
Here are the major limitations of restricted stock units;
- RSUs are just compensations that employers promise their employees. These stocks do not yield dividends until the vesting schedule is complete.
- Restricted stocks are subject to taxation. The are taxed using the Section 1244 of the Internal Revenue Code.
- RSUs become actual shares when they are fully vested to the employee.
- Employees with RSUs cannot exercise voting rights until the actual shares are issued.
- If an employee does not stay long enough with an employer to be vested an RSU, this benefit can be forfeited.
Examples of RSUs
This illustration is helpful for a clear understanding of what a restricted stock unit is; Brandy is a new employee with XYZ company and due to the skills and expertise he offers the company, he is promised 2,000 RSUs as an incentive so that he would stay longer with the company and develop the company with his skills.
The RSUs promised are different from his basic salary and other benefits. These stocks are to be vested to Brandy at predetermined schedule called the vesting schedule. After the vesting schedule is completed, Brandy receives the RSU as actual stock, this means if each stock is worth $15, Brandy is entitled to $25,000 worth of the company's stock. However, if the vesting date is means to be January 2019, for example, and Brandy leaves the job in December 2017, he has forfeited the RSUs.
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