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Restricted Stock Options (RSU) and staff retention: Why your company should be considering RSUs

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The ongoing race to recruit and retain top talent is happening over an ever-changing landscape of flexible and remote working arrangements, ethical and environmental standpoints and market fluctuations. That this is also occurring against the backdrop of the great resignation means there is a lot for employers and HR specialists to consider. Recruiting and hiring new staff is costly and time consuming, high turnover can leave knowledge gaps and has a negative impact on morale.

Employers who are embracing new ways of rewarding staff, stepping away from the free doughnuts and traditional cash bonuses, have been reaping the benefits of decreased absenteeism, lower employee attrition and increased productivity. One item in the armory that has proven particularly successful is equity compensation since it ensures your people have an actual, financial interest in the performance of the company. Millennials in particular are repeatedly reported as stating that they are likely to choose an employer based on the equity compensation offering, meaning it is a very desirable component in any remuneration package, and could give you the edge over competitors.

There are a number of choices available under the umbrella of employee ownership, from ESOP and ESPP to Stock Options, however Restricted Stock Units (RSU) have grown in popularity, with companies like Microsoft, Amazon and Verizon adopting them to motivate and reward staff. Equity compensation can be confusing but at Global Shares we engage with and advise companies every day. Employee ownership simplified – it’s what we do, so arrange to speak with one our experts today.

How does it work and why you should consider Restricted Stock Options (RSU)?

Restricted Stock Units (RSU) give the holder a commitment to receive the value of a specified number of units at a point in the future (vesting date), without having to pay anything for them, provided they achieve a set target or goal. Employers find this appealing since the goals linked to unlocking the full benefit is dependent on the performance of the employee, who must remain with the company until that future date. Employees therefore get an interest in the company but nothing tangible until after the vesting period has expired or the assigned targets have been achieved, unlike with a cash bonus where they could decide to leave the week after it’s been paid.

It’s important to note that one unit in an RSU does not necessarily equate to one share. Your plan might be set up so that 100 units equals 1 share, vesting at a rate of 25% per annum over 4 years, allowing your employee to unlock benefits throughout the duration, depending on them having reached certain milestones, targets or goals.

What companies offer RSU?

As a way to attract, reward, incentivize and retain motivated and capable staff, it should come as no surprise that RSU has proven to be very popular. This is noticeable across the spectrum in established companies, public companies and companies that are either about to IPO or looking to be acquired. Although it’s extremely prevalent in the tech industry RSU is not limited to this sector alone, with companies ranging from Starbucks and Uber, to Apple and Bank of America, who launched details of a very favorable offering in January 2022,  all offering it as a form of equity compensation to their employees.

Benefits of RSU:

  1. Employee retention

Startups often use equity compensation programs as a cost-effective employee benefit plan to encourage loyal employees, while fast-growing private companies see it as a motivator to recruit and retain staff while they build towards an IPO or acquisition. This could even be the clause in the benefits package, that the company must IPO or be acquired for the rewards to be unlocked. Your staff are unlikely to depart knowing they could potentially be leaving behind thousands of dollars if they’ve exited prior to the vesting period ending.

For already established companies with a high stock price, RSU can work as a great way to offer stock to staff. For example when Microsoft invested in Facebook in 2007 their stock price saw a rapid rise, growing massively over the subsequent 10 years. It was at this point that the social media giant began to offer RSU as part of its employee remuneration scheme.

  1. Taxation

The employee is taxed when they receive the units and again when they sell them. After the vesting period, when the company allocates the units, income tax is paid and processed by the employer through payroll, like with normal wages. This is generally covered by the sale of some of the units so the employee normally doesn’t have any upfront cost themselves. Depending on when the units are then sold onwards they might become subject to capital gains tax, but there can be restrictions, depending on how the stock is classified and the status of the company at the time.

  1. Motivation and Vesting

As mentioned the vesting period is the time between the promise of the units and when they are issued. It is the amount of time an employee has to work at a company before they receive the payment and there are normally conditions attached too, such as the passage of a stated period of time, individual performance or the achievement of corporate goals, which will serve as good motivators for your staff.

  1. Charity

Your more altruistic employees may even consider donating their RSUs as a charitable contribution, which brings with it not only the satisfaction of having helped a good cause but the subsequent tax benefits which come with it. This option is not something that’s available with all equity awards.

  1. RSU: Benefits For Employees:

That there is no upfront cost to the employee, RSU is less subject to market fluctuation than other offerings like Stock Options which could potentially go underwater and the favorable tax treatment mean restricted stocks can be a very popular and an enticing choice for desirable staff when it comes to them choosing their next employer or remaining with their current one.

Find out more and request a free demo:

At Global Shares we understand the power of employee ownership. We engage with companies around the world every day to manage their share plan solutions, from trading and compliance, to tax and promotion. Get in touch to find out how our dedicated team of specialists can help your company find out if Restricted Stock Units are the right choice for you. Employee Ownership simplified – it’s what we do.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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