Restricted Stock Units - “Vest Day is the Best Day!”
By Dan Trumbower, CFP
A great client of ours once said this to me – and it stuck! There’s a reason this client was excited about his RSUs and why other employees with these options should be, too.
Restricted Stock Units (or “RSUs”) continue to gain traction as part of company compensation plans. Not only are they a great way to incentivize employees with shares of company stock at future dates, but they are also a tremendous tool to help retain top talent from the employer perspective. The present value of your RSU grant is known up front, while the future value is highly uncertain as it’s tied directly to your company’s stock price – and your tenure around vesting schedules.
Dan Trumbower
So as long as you have confidence in the future success of your company, you should be excited about your RSUs. You can even try and negotiate the number of RSUs being granted after your initial job offer, the same way you would with a salary. In fact, this should be viewed as part of your total compensation package. The RSU portion could end up being very lucrative depending on the prevailing stock price down the road.
Don’t let the term “restricted” throw you off, though it is important to understand. Your share grant is restricted until specific vesting dates are met and the employee remains in good standing with the company. Job termination almost always results in forfeiting unvested RSUs, while death, disability and possibly retirement may allow them to continue to vest or even accelerate vesting. Be sure to check your plan agreement for details.
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Essentially, RSUs represent the future right to receive shares of company stock. Vesting schedules could be annually, quarterly, monthly or a combination depending on your plan agreement. For example, you were granted 10,000 RSUs. After the one-year anniversary, 25% (2,500 shares) will vest and then again annually thereafter. If you leave your job after the first vesting date, 7,500 of your shares will be forfeited back to the company. If you are unhappy with your job, it’s important to factor in this lost income and the timing of your departure around these vesting dates. Once the RSUs vest – the shares are yours!
Don’t forget taxes! When RSUs vest, a tax event is triggered, and the gross market value of your shares is subject to ordinary income taxes. Typically, a portion of the vested shares are sold to cover your tax obligation, leaving the employee with a net deposit of company stock. These wages and tax withholdings are reported on your W2. The statutory federal withholding rate is 22%, and sometimes this rate cannot be adjusted. Therefore, it’s important that you work with your CPA on tax projections, especially if you are in an upper bracket, so there are no nasty surprises the following April.
RSUs carry a unique benefit compared to other stock incentives such as Non-Qualified (NQs) or Incentive Stock Options (ISOs) because there is no exercise price. Even if your company stock price falls substantially, your RSUs will most likely always be worth something. If your stock ends up vesting at a lower price, it’s less you will have to pay in taxes, and you can continue to hold the shares until the stock price recovers and then diversify at a later date.
About the author: Dan Trumbower
Dan Trumbower, CFP®, is a Senior Wealth Advisor at Halpern Financial, a fee-only, independent, fiduciary wealth management firm in Rockville, MD, and Ashburn, VA. Dan received a BSBA in Finance from Coastal Carolina University, and is a CFP® professional and has special expertise in financial issues affecting key executives of large corporations (such as restricted stock awards, incentive and NQ stock options along with NUA distributions from employer savings plans).
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