RSUs

            RSUs are short for Restricted Stock Units, and they are a form of deferred compensation given to employees, managers, directors, executives, and Board directors. Obviously, the number of shares granted tends to be logarithmic, with low-level employees receiving a few hundred shares and many C-Level executives receiving tens of thousands.

            This is what you do: divide the grant amount by the initial grant price. The initial price is (usually) determined by calculating the average of the last five days’ closing stock price (assuming the company is public and the shares are listed on a major stock exchange).

            Say that you receive a $10,000 RSU grant upon date of hire. Say that the company’s average stock price was $10 the week before you started. You would receive 1,000 shares. Sounds simple enough at this point, right?

            But here’s the kicker: you can’t lose money on RSUs. The stock can go up and down and even reach 0, but it basically functions as a bonus tied to company performance (in the stock market, that is). So you have a vested (no pun intended) interest in the company doing as well as possible. In practice, since stock price can be manipulated and even foretold by insider knowledge, many nefarious things have happened to the point where RSUs were necessary—you simply cannot buy and sell these shares. (Hence the term ‘restricted’). The shares aren’t even technically yours—and they’re not even real shares of company stock—some equity professionals call them ‘phantom’ shares.

            Plus, in most cases, you have to hold onto them for at least a year, depending on the vesting schedule. Here’s what vesting is:

            When you receive the 1,000 shares of stock, obviously you can’t sell them (one key difference between RSUs and stock options). You have to wait a period of time before they ‘vest’ and you’re paid out the multiple of the current stock price and the number of your shares. In many cases, grants will vest 1/3 over 3 years, ¼ over four years, or some other predetermined schedule. Some grants vest quarterly, which is a pain in the ass for your company’s stock administrator and HR department and finance/accounting. Not to mention it encourages turnover since employees only have to last three months before they’re paid out. You’ll see this with newly-IPOed companies, mostly.

            But at the end of each vesting period you get paid out and the amount is taxed as ordinary income. You’ll see this on your W-2. No capital gains to be reported. All the IRS sees is an uptick in revenue.

RSUs, then, are usually safe ways for companies to reward and incentivize employees, although in practice this can be difficult. For one, a company could do poorly in the stock market, effectively reducing an employee’s bonus. The second and more insidious reason involves the second sentence of this chapter: grants are unequally distributed. All it takes is an employee to be classified as ‘high-potential’ to receive a retention grant worth thousands of dollars.

Similarly, given the muddy nature of how promotions work at most companies, you can bet your sorry behind that relative base pay equity means little to a VP being issued 20,000 shares on a three-year schedule. CEOs and other highly-compensated individuals, in addition, are paid out the remainder of their vested (and sometimes unvested) shares at termination as part of severance. No matter if the termination was for cause, for example playing accounting tricks or firing employees they harassed. Many executives have clauses written in their offers/contracts that explicitly govern the vesting and payout of these tremendous RSU grants.