Attract. Reward. Retain.
With workers across the globe on the move it’s imperative that employers are using every tool available, not only to ensure they have the right people working for them, but that they are holding onto that key talent. The Great Resignation and the Great Reshuffle have shone a spotlight on the number of employees who are voting with their feet and seeking change meaning, for employers, now could actually be the perfect opportunity to look at their existing employee remuneration offerings and to maybe hit refresh.
Research regularly shows that modern workers value companies who embody employee ownership values, where feeling rewarded and appreciated is a priority. Employee ownership reward schemes give staff the ability to become personally invested in the performance of the company, which in turn breeds loyalty and dedication.
Employers and founders who noticed the positive link between employees holding an equity stake in the business and improved workplace performance have been implementing and adapting their compensation strategies accordingly, to guarantee they have the right workers onside, the exact type of people who are going to drive them towards success.
There are a variety of programs available to choose from when it comes to rewarding and incentivizing employees through equity compensation, two of which are Restricted Stock Units (RSU) and Stock Options.
What are they? Restricted Stock Units (RSU) vs Stock Options
Stock Options were once the employee reward scheme of choice however Restricted Stock Units (RSU) have emerged as an increasingly popular form of equity compensation in recent years in both established companies and startups.
RSUs grant the participant employee company shares if they achieve certain performance goals or complete a set tenure with the employer, whereas with Stock Options the company is giving an employee the right to purchase company shares, at a pre-determined price, on a set future date.
In short RSU is dependent on the performance of the staff member themselves whereas for Stock Options the value is dependent on the company’s share price.
Regardless of whether you choose Restricted Stock Units, Stock Options or some other form of employee equity awards scheme the benefits are that they encourage retention and loyalty, performance is improved and employees are more engaged. How you determine which works best for you, your company and your staff will of course be dependent on a range of factors and that’s why it’s important to speak to the experts. At Global Shares we help companies every day to plan their perfect employee compensation strategy. Employee Ownership, Simplified – it’s what we do.
At a glance: Key differences between RSU and Stock Options
While there are some similarities between RSU and Stock Options it’s important to be aware there are very specific differences too, such as how the employee receives the compensation, how they vest and taxation.
With an RSU the employee is granted the actual stock without having to pay anything, whereas with Stock Options they have the opportunity to purchase company shares with a view to selling them at a later date.
Set vesting schedule or at benchmarks
Set vesting schedule
Shares issued following vesting
Shares owned upon exercising
Voting rights following vesting
No voting rights until exercising
No payment required from employees
Employees must pay at strike price on exercise date
No purchase cost, sell high
Buy low, sell high
Taxed when vested
Taxed when exercised or sold
Popular with late-stage startups and public companies
Popular with early or mid-stage startups
RSU vs Options – Tell me more, tell me more
Restricted Stock Units give the holder a commitment to receive the value of a specified number of units in the future (vesting date) without requiring payment upfront provided they achieve a set target or goal. What’s even better, aside from tax obligations, when the company allocate the shares the employee doesn’t pay anything for them. RSUs are often used as part of an executive or senior management remuneration package and will be contingent on performance related benchmarks being met.
It’s worth noting that one unit in an RSU does not necessarily equate to one share, it could be 100 units equals 1 share. As such RSUs are often best suited to established companies where stocks may already be highly priced and granting multiple shares would be prohibitive. Facebook, for example, adopted the use of RSU as a reward incentive in 2007 following massive investment by Microsoft which saw the value of shares increase dramatically.
Stock Options, on the other hand, are common among startups, especially in the tech industry, since they are more likely to see fast growth at the outset. They give the holder the right, but not the obligation, to buy stock on a future date (vesting period) at a price established at the time of issue, the incentive being the stock price might go higher so stocks can be bought at a discounted rate.
Stock Options are derivatives since they derive their price from something else, i.e. stock price, so encourage a positive performance and staff retention until the end of the term. However, since the value can fall as well as rise there is no guarantee they will move above the grant price and the options could potentially expire worthless as employees are unlikely to pay more for stock at the end of the term than what they are worth.
Vesting refers to the process of earning shares over time and is the period between the grant or promise of the shares and the date on which the requirements are satisfied. The benefit for the company is that it encourages employee retention with staff unlikely to leave before the end of the term, otherwise they may receive nothing.
An RSU can be set up to be awarded on a set vesting schedule or through performance benchmarks with the full value not fully transferable until preset restrictions have been met. Vesting periods are usually satisfied by the passage of a stated period of time, individual performance or the achievement of certain corporate goals with employees unlocking their rewards along the way. The value of the RSU on the day of vesting is subject to payroll and ordinary income taxation deductions. Should the employee cease employment prior to all the conditions for vesting having been met then they may not receive some or all of their units.
Stock Options offer the right to buy a specific number of shares of company stock at a pre-set price, (strike price) for a fixed period of time, following the vesting period. This will generally span three to five years. Often an allotted percentage of options will vest each year along the way and the employee can decide whether to purchase (exercise) the shares or not, as they become available. American Options can be exercised at any time between stated purchase and expiration dates whereas European Options can only be exercised on the expiration date. Since Stock Options are market linked there is no guarantee they will rise or be worth more than the pre-set price.
Conditions linked to vesting periods can be time-based, performance related or liquidation dependent, meaning they will only vest after an IPO or if the business is bought out by another company.
Once RSUs become vested and liquid, or on the date that the units pass to the employee, they become taxable and subject to income tax and other relevant taxes, depending on the jurisdiction in which your employee is based. Deductions would normally be processed through payroll with the employer withholding a portion of the RSU in order to pay any taxes, similar in fact to how income tax is paid on normal wages. Should the employee wish to pay the taxes themselves, using their own money, they would then retain all the vested RSUs.
Stock Options become subject to ordinary income tax or capital gains tax depending on when they are sold. No taxes are due at purchase when ownership of the stock passes to the employee, but taxes come due when they are sold onwards by the employee. Tax is paid on any profit made on the sale of the shares as income tax and other local taxes if sold within 12 months, or where the Stock Options have been held for at least one year, more favourable capital gains tax rates apply. Where a company has yet to IPO there may be restrictions placed on exercising any vested stock options until after the company goes public.
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Determining what option is the right one for your company, and your employees, can be complicated which is why at Global Shares, with our award-winning software platform and dedicated team of over 300 equity professionals, we can cover everything, from advising on the best form of enrolment to compliance, tax and everything in between.
Get in touch and find out how we can assist with an equity plan management solution today which will help you to attract, reward and retain the quality staff you want onside for your business to succeed.
Employee Ownership, simplified – it’s what we do.