What are Restricted Stock Units (RSUs)?
Restricted Stock Units, commonly referred to as RSUs, are a form of compensation offered by an employer to an employee in the form of company shares. However, the shares are “restricted” because they are subject to certain conditions and vesting schedules set by the employer.
Understanding the Purpose of RSUs
RSUs are primarily used as a tool for employee retention and motivation. By offering RSUs, companies can incentivize employees to contribute towards the company’s growth and success, as the value of these units is directly tied to the company’s performance.
RSUs and Employee Retention
One of the main purposes of RSUs is to encourage employees to stay with the company for a longer period. This is achieved through the vesting schedule, which stipulates that the RSUs will only become the employee’s property after a certain period of employment or upon achieving specific performance milestones.
RSUs as a Motivational Tool
RSUs also serve as a motivational tool, as they give employees a sense of ownership in the company. This can lead to increased productivity and commitment, as employees are more likely to work towards the success of a company in which they have a personal stake.
How Do RSUs Work?
When a company grants RSUs to an employee, they are essentially promising to give the employee shares of the company’s stock in the future, subject to certain conditions. These conditions often include a vesting schedule, which means the employee will only receive the shares after a certain period of time or upon achieving certain performance goals.
Vesting Schedule
The vesting schedule is a crucial aspect of RSUs. It determines when the employee will actually receive the shares. For example, a company might grant 1,000 RSUs to an employee, but stipulate that 25% of the units will vest each year over four years. This means the employee would receive 250 shares after one year, another 250 after two years, and so on.
Tax Implications
It’s important to note that RSUs are considered taxable income. However, they are not taxed at the time of grant. Instead, they are taxed at the time of vesting, when the employee actually receives the shares. The amount of tax is based on the fair market value of the shares at the time of vesting.
Key Takeaways
- RSUs are a form of compensation offered by companies to their employees in the form of company shares.
- They are used as a tool for employee retention and motivation, as they give employees a sense of ownership in the company.
- RSUs are subject to a vesting schedule, which means the employee will only receive the shares after a certain period of time or upon achieving certain performance goals.
- RSUs are taxed at the time of vesting, based on the fair market value of the shares.