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Restricted Stock Units (RSU)

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There are many benefits that employers ought to provide their employees. Among them are Restricted Stock Units or RSUs. When employees are rewarded for the work they do, it helps boost their morale and makes them want to work harder. Here we will take a look at everything you need to know about Restricted Stock Units. 

Understand Restricted Stock Units (RSU) Meaning in Detail  

Restricted Stock Units or RSUs are incentives in the form of restricted equity offered by the employer to their employees. RSUs are equity shares of the company the employee is working in and they come with a vesting period. Employees do not need to pay anything to own RSUs as they are presented to them in the form of incentives by the employers. 

There is, however, a catch here in the form of the vesting period. Because of the vesting period, employees cannot sell the RSU stocks till they complete a specific tenure, defined by the employer. Apart from the tenure aspect, the employer can use the same restriction on an employee’s performance. Under such a condition, employees would only be able to sell the RSU stocks when they achieve a certain work milestone set by the employer. 

What are the Restrictions on RSUs?   

While RSUs make for a great way to encourage employees to work more efficiently, they do come with their fair share of restrictions. Some of these are listed below:

Time-Based Restrictions:

  • RSU’s are usually provided to an employee as a reward for their loyalty and hard work towards the company

  • Time-based restrictions or the vesting period are usually determined by the employer.

  • In such a case, these restrictions act as a monitoring device to determine the employee’s decision to stay with the company for the said period.  

Milestone-Based Restrictions

  • Another method to implement the vesting period is to put up milestone-based restrictions

  • When, to sell the RSU stocks presented to them by their employer, employees need to complete a specific milestone set by the employer, it is a milestone-based restriction. 

Time cum Milestone Restrictions

  • Sometimes vesting periods of RSUs can be a combination of both time-based and milestone-based restrictions.

  • As a result, the time of being associated with the company needs to be completed and the work milestone needs to be achieved so that employees can sell the RSU if they want to.

What to Do with RSUs?   

Once employees have completed the vesting period of the RSUs, they can always choose to sell some or all of the stocks in the RSU. Though this is something employees can do after the vesting period, doesn’t mean it will be the right decision to take at a particular time. Sure selling all of RSU stocks will be a better decision if the stock prices keep fluctuating constantly. 

However, it is always advisable for employees to only sell stocks when they know that the prices will not climb higher beyond a specific point. This helps them make profits without risking the price of the stocks falling suddenly.  

Restricted Stock Units (RSU) Taxation  

Every equity share comes with its taxation aspect. RSUs are no exception. When taking the taxation aspect of the RSUs into account, the fair market value of the reserved stock units needs to be taken into account. To expand, the fair market value of RSU stocks is the price at which they are sold on the market on the vesting date. 

If the employee receives foreign company shares in RSUs, then for taxation purposes, the exchange rate of the currency on the vesting date will also be taken into account. RSU tax is calculated on two dates; on the vesting date and if and when the employee sells his/her holdings.

Advantages and Disadvantages of RSUs    

Having explored almost all the aspects of RSUs, here is a look at some of the main advantages and disadvantages that they hold for the employee. 

Advantages:

  • RSUs can prove to be major morale boosters for employees to not only achieve their targets but also offer more to the company as a whole.

  • Seeing as RSU is a reward for employees who are loyal to a company, it also acts as an incentive to remain with the company for a longer time.

  • RSUs do not require any investment from the employee’s side

  • With an RSU, employees become part owners of the company without having to pay for it. 

Disadvantages:

  • RSUs do not come with a dividend income attached to them.

  • If an employee is terminated, any benefits of reserved stock units get revoked. So if an employee chooses to leave the company during the vesting period, they lose access to the RSU.

  • In the case of milestone-based RSUs, if it takes too long for an employee to achieve the milestone, the vesting period can get pushed further.

Conclusion   

RSUs can truly be a great way to offer incentives to employees and help them feel appreciated for the job that they do. Even with the vesting period in place, RSUs can prove to be extremely profitable for employees when they choose to sell the stocks. However, employees also need to remember that if they receive the RSU of a foreign company, they need to disclose the same under the Foreign Asset Schedule (FAS).

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

What is restricted stock unit (rsu) meaning?

Answer Field

Restricted Stock Units or RSUs are incentives in the form of restricted equity offered by the employer to their employees. RSUs are equity shares of the company the employee is working in and they come with a vesting period. Employees do not need to pay anything to own RSUs as they are presented to them in the form of incentives by the employers.

Are restricted stock units good?

Answer Field

Yes, RSUs can be very beneficial as it helps employees feel appreciated and they can gain potentially good returns upon selling them.

What is the purpose of RSU?

Answer Field

The purpose of RSU is to make employees feel seen and appreciated and make them want to work harder for the company as well.

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