Each day, employers are getting smart with how they compensate their employees. Stock plans are becoming more popular, especially for top management. The objective is to incentivize employees to remain with the company, thus creating a cycle of success between employer and employee relationships.
But what are employee stock options, and how do they work? In this article, we'll discuss the basics of stock plans and how they can be used to maximize rewards for an employee or employer.
RSUs (Restrictive Stock Units)
RSUs are similar to stock options, but they differ in certain ways. Generally, RSUs do not require payment upon exercise. Instead, they provide the employee with a specific number of shares that vest over time or when predetermined goals have been achieved.
When it comes to taxation, RSUs turn from an option to a stock on its vesting date. This is now a taxable event, much like a cash bonus. Many plans — but not all —will sell a portion of the shares that vest to cover the tax hit. Very similar to when an employer may withhold taxes on a bonus. Also, any additional taxation would be triggered from the stock going up or down after the vesting date. [Google Employees may be offered Google Employee Stock Units (GSUs) – these work in the same fashion as RSUs]
Therefore, mechanically, this is like receiving a cash bonus, opening your own brokerage account, and buying your company stock at the current stock price.
This is critical in framing your decisions outlined below.
Do you Hold or Sell?
The best way to think about vested RSUs is to treat it like it’s a cash bonus on the vesting date. This is your guiding compass. Again, keeping the stock after it vests would be as if you received a cash bonus and used it to purchase your company stock (as an independent decision.)
Is this what you would want to do with a cash bonus? If your answer is yes, then holding onto the stock is the right decision.
Alternatively, if you receive the same cash bonus, would you prefer to use that cash to meet your lifestyle expenses? Or perhaps you’re looking to take that cash bonus and investing it in a more diversified portfolio to better align with your investment objectives. Then maybe selling the stock is the way you should go.
One challenge many people face is recency bias and developing a personal attachment to the stock. This could stem from either people being comfortable holding on to what they know, having a sense of permanent ownership because the stock was given to them, or firmly believing in your company’s upside potential.
Inevitably, you will take part in your company’s stock success in the unvested portion of your RSUs. But if you think of the RSUs, at the time of their vesting date, as cash bonuses, it may make your decision on whether to hold or sell easier for you.
Not only can my team help answer any questions you may have about stock option plans, but we also recommend you speak with a tax professional before making any financial decisions.
Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters. CRN202605-4403321