Restricted stock units (RSUs) are increasingly more common and play a prominent role as part of the compensation packages for employees, especially in public companies and start-ups. Marking their growing significance in the 30s and 40s age group, a comprehensive understanding of this type of compensation becomes necessary.
RSUs are a kind of employee compensation provided in the form of company shares. The caveat is they’re “restricted,” which implies there are terms and conditions accompanying their distribution and vesting. For instance, to claim the full value of these shares, employees must typically fulfill specific “vesting” requirements, such as a predetermined employment period or achieving certain performance milestones.
RSUs bear similarities with another type of equity compensation, stock options. However, they differ fundamentally. While both offer company shares, the employee must purchase stock options at a predetermined price, whereas RSUs are granted free of charge once they’ve met the vesting conditions.
For a typical 30 to 40-year-old employee, the role of RSUs is significant. In addition to basic monetary compensation, this type of compensation can serve as a considerable wealth creation source. With the company’s growth and share price appreciation, the value also increases, providing employees with a potential windfall.
Furthermore, RSUs are an effective tool for employee retention because they encourage employees to stay with the company to meet vesting conditions. Retention is particularly important for start-ups that employ a ‘cliff vesting’ schedule, where a large tranche of units vest after an initial period, typically four years.
Tax implications of RSUs are another aspect to be aware of. In most jurisdictions, vesting is considered a taxable event. The amount taxed is the fair market value of the shares at the vesting time, taxed as ordinary income. To cover these taxes, companies often use “share withholding,” a method where they withhold some of the vested shares to pay the taxes, and the employee receives the remainder.
When selling vested units, the capital gains tax comes into play. If the shares are sold immediately after vesting, there’s typically no capital gains tax. On the other hand, if the employee holds on to the shares and sells them later at a higher price, the gains are subjected to capital gains tax, potentially at a lower rate than ordinary income tax, though this varies by jurisdiction.
It’s crucial to note that RSUs, like any other investment, carry risks. Their value is directly linked to the company’s performance and its share price. Should the company underperform, the value can fall.
In conclusion, RSUs serve as a lucrative compensation mechanism for employees. They play a vital role in wealth creation and foster employee loyalty, however, they bring tax implications and risk factors. As such, understanding these nuances in depth can help individuals in the 30 to 40-year-old age bracket make informed choices about their wealth management and financial planning. Knowledge about RSUs may open avenues for potential growth and prosperity in one’s career.
Connect with an advisor at Good Life Asset Strategies to discuss the role of RSUs in your portfolio and how they can help you build wealth.
The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.
Schedule a complimentary 30-minute consultation.