There are many types of employee share plans that an employer can include in an employee’s remuneration to attract and retain the best talent. Each kind has its own set of rules that apply to how that stock is managed, granted, and taxed. It’s important to understand these differences if you have access to your company’s employee share plan.
Restricted Stock Units or RSUs are common types of shares granted to employees. They offer a future promise of uncertain value; the value based on the stock price of the company when the restricted stock vests.
Vesting is usually dependent on a specific vesting schedule, which generally requires the employee to stay employed with the company for a certain period of time before the restricted stock will vest. Once they do vest, however, the restricted stock goes from a promise to value you actually receive.
It’s essential to take the time to develop a clear understanding of how your restricted stock works and how it can benefit you. Once you do so, you can develop a better strategy for how to best manage restricted stock in your financial plan.
Here are 3 Tips to maximise the value of your RSUs.
1. When you receive RSUs is easy to Understand
One of the more attractive features of RSUs is their simplicity compared to other forms of employee shares. With restricted stock, the timeline of events is straightforward and easy to follow.
It often looks a little something like this:
Your employer grants restricted stock to you. Being granted restricted stock is not a taxable event.
Your restricted stock vest after you meet the vesting requirements, and you are taxed on the value of the units that day.
Some (or all) of the income tax is due in that financial year.
You receive shares of stock in a brokerage investment account equal to the value of these shares at vesting.
Once the shares are deposited into your brokerage account, you own them just like you went out and bought them yourself that same day. You can then keep them or sell them as you wish.
2. RSUs are Easy to Value
RSUs are one of the easier types of equity compensation to value. You can calculate the value of your restricted stock by multiplying the number of restricted stock awarded by the current fair market value of the stock:
Restricted Stock x Stock Price = Current Value
This calculation can be done at any time to value your restricted stock. Keep in mind that the value, as calculated above, is only a future promise. It remains this way until your award vests.
While everything could remain the same between today and your vesting date, it’s more likely that the value will change between now and then. Keep this in mind when planning a strategy around how you’ll use your restricted stock; the value today may be different than the value when the award vests.
3. Knowing When You’ll Receive Shares Is Clear, Thanks to the Vesting Schedule
When you receive RSUs, they are, in fact, restricted. This means that you need to meet specific criteria for the restriction to lapse. Only after the restrictions are met or lifted can you claim the value of the shares.
Most restrictions are tied to the vesting schedule. For example, your company may award you 2,000 restricted stock units/awards — but they only vest if you remain employed with the company three years from the grant date. Vesting schedules can vary from one company to another, and you’ll want to confirm your specific schedule.
When the restricted stock does vest, you receive shares of company stock (or the value paid as cash; again, that’s subject to specific rules laid out in your plan document). Prior to meeting the restriction set by your employer during which time you have a substantial-risk-of-forfeiture, restricted stock is deemed unvested. The value of the unvested restricted stock is not taxed.
From a financial planning standpoint, vesting, and more specifically, the vesting schedule can help you to plan a strategy for the value of your restricted stock because you know when to expect them. This should allow you to make better decisions around tax planning, investment planning, and strategising what to do when you have the option to act.
There Are Many Advantages to RSUs — Be Sure to Make the Most of Them
The overall simplicity of RSUs, as compared to other forms of employee share plans, make them an attractive company offering. RSUs can also generally result in something of value for you as the employee (assuming the vesting periods are met) without requiring you to make a lot of decisions along the way to get to that outcome.
To make the most of this opportunity, take the time to understand how much value you have in restricted stock, how you plan to address income tax and cash flow post vesting, and how you plan to incorporate that value into your financial plan.
Even though some of the advantages of restricted stock make them easy to understand, making consistently good decisions with the value is vital to achieving a positive outcome.