Restricted Stock Units (RSUSs) are a common form of employee compensation, given by awarding stock shares. RSUs grant the employees of a company shares in that firm subject to a vesting schedule, often determined by certain criteria, such as a certain number of service years. They provide incentive for prospective employees in regard to attaining and retaining their talents. We already have an up-to-date overview of how RSUs function, which can be found here. This article is concerned with weighing up the advantages and disadvantages of utilising RSUs as opposed to more traditional forms of employee compensation.

Advantages

For employers, paying out RSUs can come with a number of benefits. One key factor, as picked up on in the introduction is that they provide incentive for employees to stay at the company. RSUs undergo a vesting period during which they cannot be sold, and once vested are treated as normal stock options. Thus, especially during the vesting period, this is a stimulus for employees to stay on with the company long term and aid in making improving company performance, it being also in the employee’s interest for the stock value to increase.

RSUs also provide more simplicity for the parties involved. They are simpler to understand as opposed to other compensation forms, with clear shares values and vesting schedules. This also makes life simpler for the administrative departments, as it isn’t necessary to track and record different shares and stock options.

Finally, RSUs also are more buoyant in relation to value as opposed to stock options. As long as the company in question’s value doesn’t drop to £0, they will always have some worth. With stock options this isn’t necessarily a given, especially when considering exercising costs and strike prices.

Disadvantages

First of all, RSUs require an employee to work for the company for at least the entire vesting period if they wish to reap all the rewards. If an employee resigns before the vesting period is over, then they may have to forfeit all of the shares that haven’t been vested yet back to the company. So if an employee receives 100 RSUs which vest over four years, they will gain those 100 RSUs once that period is over. If they were to leave the company after 2 years, however, they would likely have to forfeit 50 RSUs back to the company.

Further, the taxation regimen can also provide issues for many RSU receivers. It is a difficulty in timing, employees not being able to pay tax on RSUs before they have vested. Once this happens, you will need to pay income tax and employee national insurance obligations on these. This can yield complications as liquidating these stocks may result in a heavy tax burden for the employee. There is one caveat here, namely that this mainly applies to private companies. If the company is publically listed, it should be easy offset the tax burden.

One last point to note is the question of dividends and voting rights. RSUs are effectively locked away during their vesting period, so that many of the side-benefits won’t be enjoyed until they have vested. Unlike stock options, the employee won’t receive any dividends or have any voting rights until the actual shares are issued once vested.

Overall, RSUs provide many benefits, explaining why so many companies have moved to them as an employee compensation option as opposed to traditional stock options. They provide incentives for employees to stay on at a company and aid in improving the company’s standing and valuation, promote simplicity as well as ensuring value, as they won’t fall below £0. Nevertheless, there are tax complications that can ensue as well as the flip side of the first point, that employees are effectively forced to stay on at the company if they wish to reap the full rewards of the RSUs they have received. If working at a publicly-listed company, restricted stock options may be an attractive prospect, however, at a private company it may be more sensible to steer towards stock options.

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