I hit a recent milestone in my professional working career when I was recently granted RSUs, or restricted stock units. I had heard about such financial incentives from colleagues and I had been aware that these might be something I would have added to my compensation plan; and it finally happened. I’ll start this post by saying that I’m super fortunate and am very grateful for this compensation, I recognize that not everybody is employed, gainfully employed or in a position where they are getting raises.

RSUs are a great incentive that companies can offer as a way to reward talent and continue incentivizing employees to stay and/or work hard. In this post I’ll cover how they work (although I’m a first timer here) and why they are both awesome and not that awesome at the same time.

Explain it to me like I’m 5

For many of us, we get a regular paycheck from our employer. On top of that, you might be earning commission, or some sort of a bonus. Additionally, if your company is publically traded, you might also be able to participate in their Employee Stock Purchase Program (ESPP); allowing you to purchase company stock at a discounted rate. Now we’re talking about another way to earn money – Restricted Stock Units (RSUs).

RSUs will vary based on their amount an their timeframe, but I think that a 4 year grant is fairly standard. So in my case, I was given a dollar amount for my grant. This dollar amount was transferred into a number of shares, i.e. the market price at the time my grant was issued. My granted shares will then vest, or become mine over the next 4 years. There is a “1 year cliff” which means I don’t get any shares until the one-year anniversary of this grant. One year from now I will receive 25% of the shares. Then, every quarter (3 months) I will receive 1/16 of the shares. If I leave during these 4 years, I will forfeit any of the unpaid shares. There is a world that I could receive another grant during this timeframe, but I’m not letting my mind dream too big like that!

So, to help sweeten my compensation package, my employer will be giving me shares of company stock over the next 4 years. I have to wait 1 year for my first batch, and then every 3 months I’ll get another smaller batch until the end of this 4 year period.

Why companies do it

Employers view this as a great way to reward talent and to encourage them to stay. Suddenly now if I ever am thinking about leaving my company, I’ll have in the back of my mind that I’ll be forfeiting shares coming my way. The company I work for is publicly traded, meaning I can sell the shares anytime once I own them  -i.e. cash money. It’s also a great way to pay me instead of just handing me cash – company shares mean the value can go up or down. My shares are fixed in quantity, so if the stock price goes up, that’s just more money in my pocket. So, in theory they are also incentivizing me not only to stay, but also to work hard. Of course I’m one of many at this company so my own actions likely won’t make the stock price go up – but if everybody is working their hardest – then hopefully the company does better and the stock price goes up! Finally, companies like this grant because it’s over 4 years. This in a way is lower risk for them – less to no money up front and they only pay if I stay (and to stay that means I’m doing good work).

So, in many ways this is a win-win scenario for both my company and me.

Photo by Austin Distel on Unsplash

Tax implications

Gah, I just had to bring taxes into the conversation didn’t I? In the way that these stock options are structured; I am getting them at a $0 cost basis, meaning I didn’t pay anything for these shares – so if the share is worth $100, I am getting $100 worth of goods. So, I am in theory getting both income and an asset. I am getting $100 (example) worth of income – i.e. a good is being paid to me worth $100, so I will owe $100 in income. Then, if the stock goes up to $110 and I sell it, now I owe tax on the $10 in profits I’ve made. (Or at least this is how it works in my head – to be fair this is my first time with them and I’ve based this on conversations with colleagues that have RSUs).

To account for this income I am receiving, the common option that I’ve learned about is called ‘sell to cover’. That means at the same time my grant vests, my company will automatically sell a few of those shares and use that cash to cover the tax bill. Not super cool instantly losing some of the shares I just got, but better I suppose then having to pay for the taxes out of my own pocket!

Why they are awesome and also not awesome

So this is a bit of a loaded response, obviously free shares being paid to me is pretty awesome. It’s a great add-on to my compensation and I’m very grateful for the supplemental income, and the chance to earn more if my company stock appreciates. On the other hand, once you break it down and look at how much I’m being paid per year / per quarter, those numbers get a little smaller and suddenly you might realize that they move the needle a little less than you had initially thought. Will this stock grant keep me here for another 4 years? It will help but it won’t guaranteed keep me here. It is another dollar amount that is part of my compensation that I would take into account, but at the end of the day it’s just a dollar amount. Also, it’s not super awesome that it has a one year cliff – so I won’t see any of this for a whole year! Not the end of the world, just not as awesome as it could be!

Summary

RSUs are a great add-on compensation tool that employers may award employees for their great work and as a way to reward them and in their mind, hopefully give you more incentive to stay and keep working hard! Yes there are some trickier tax implications, but I try to remind myself that paying more taxes means that I’m making more money! All in all I’m grateful and excited about this raise that I received!