What is a restricted storage unit RSU

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Restricted stock is better than stock options Updated July 20, 2016 Many companies are affected by the FASB (Financial Accounting Standards Board) recommendation that stock options be displayed on the company's expense sheet. High tech and startups in particular are concerned because they are afraid of losing one of their great motivational tools. You don't need to worry. There is already better compensation choice, restricted stock options. Motivation through Restricted Stock Issuing Restricted stock is a better motivational tool than granting stock options for two reasons. First, many employees don't understand stock options. They don't know that they have to take action to realize a profit. It's much easier for them to understand a restricted inventory hold-up period. Second, like stock options, the restricted inventory can become worthless. Even if the stock price goes down, the constrained stock retains some intrinsic values. A stock option grant with an exercise price of 10 has no value if the stock trades at 8. Restricted stock awarded when trading at 10 is still worth 8. A stock option has lost 100 of its value. The restricted stock only lost 20. Worker Ownership Through Restricted Inventory One of the benefits of restricted inventory from a management perspective is to better motivate employees to think and act like owners. As a restricted stock issue grows, the employee who received the restricted stock becomes the owner of the company. He or she didn't take any further action to make it happen. The employee is now a partner and can vote at the annual meeting. Actual ownership of a portion of the business is a powerful motivational tool in trying to get employees to own the company39s goals. This makes them more focused on meeting goals. Stock options, on the other hand, do little to convey a sense of ownership. They are seen by most as a high risk game that has potentially great rewards. A person can very well invest a few years in helping a company grow and flourish if compensated for that time through stock options. However, their loyalty is to increase the share price so that the company can cash out and make a bundle. You have no loyalty to the company and its goals. Often times they will choose actions that will increase the stock price in the short term, increasing their potential profit, rather than a long term view that will help the company. Restricted Stock Supporters The LA Times reports that Microsoft plans to replace stock options with restricted stock grants. Amazon. co. UK notes that all of their employees are assigned a number of Amazon restricted share units when they join. Altria Group, Inc. notes in its annual report that in 2003 we invested in shares of restricted shares rather than fixed income stock options34. Dell Computer Corp. Cendant Corp. and DaimlerChrysler AG are to remain limited to shares instead of stock options. Restricted Stock FAQ If you have any questions about restricted stock prices as a motivational form of compensation, please refer to this for more information. There is a similar FAQ on stock options here. Manage This Issue Restricted Stock Awards are a better tool for employee motivation than stock options. Restricted stock awards are better than stock options for motivating employees to think and act like owners. Restricted stock awards are treated better than stock options in the annual financial statements. That makes restricted stock prices better for employees, management, investors, and regulators. There is no reason not to take this option. What's Better for the Employee Last month I asked this question more than I can count and so I thought it was a big topic to write. Although they are similar in many ways, they have huge differences that affect the decision of which to use when given the choice. Many companies have shied away from stock options and restricted stock units (RSU) due to a change in tax reporting that requires them to maintain employee stock options. Some companies, like Johnson & Johnson, actually cater for both employees and make them choose what they want. Stock options are the right to buy a certain number of shares at a preset price (grant price). Generally, options are three years from the grant date and option holders have an additional seven years from the exercise date (exercise period). Restricted Stock Units (RSU) are a grant of shares, with each unit being sold once, equal to one share of shares. The stock of shares will not be issued at the time of the grant. However, when RSUs vests, you receive one share of the company's stock for every RSU that vests. This is a table that compares the two: Restricted Stock Unit (RSU) Out-of-Value Options have value when the stock price is above the grant price, but could have no value when the stock price is below or below the grant. RSUs always have value whether the stock price is going up or down. The value of your award increases as the price goes up and goes down when it goes down. 100 vested after 3 years 100 vested after 3 years Options expire 10 years after the grant date RSUs are actual shares in the vesting. Then they're yours to hold or sell. In most cases, options are taxed as income at the time of exercise, regardless of whether stocks are sold or held. Taxes on profits can also be paid on subsequent stock sales. RSUs are usually taxed when they vest. This is general information and may not be the same for every plan. Talk to a tax advisor to determine what your taxes will be. It all depends on the company the employee works for and the employee's financial information. Here are the questions I usually want to find out about the employee and the company before making a recommendation: About the employee: What is the risk tolerance you have What tax bracket are you in About the stock: How stable is the stock Performed Over the Last 3, 5 and 10 Years Compared to the Stock Market How are the fundamentals of the stock now How does the sector that the stock is part of are looking to the future Are there any pending questions that will helphurt the company in the future If the employee replies that they have a very low risk appetite, then I would never recommend choosing options when given the choice. Because with an RSU, you get the right to actual shares, not the right to buy shares at a certain price. Take a look at Merck (MRK), for example. The employees were granted a bonus of 75.76 on March 2, 2001. These options were never worth anything. By the time of the first part of the options on March 2, 2002, the share was below 65 and no longer traded above the grant price. If the company had instead given RSU when it was worth less than it was granted, it would have given something back. If the employee responds that they have at least a moderate risk appetite, the questions above would make a difference which they choose to choose. Options and RSUs are taxed at different times, so it is important to find out what your tax bracket is and which one would help you more. If following these questions there isn't a clear choice, then take a look at the stock. If the answers about the stock are that it has been: has been very stable and has grown steadily over the last 3, 5 and 10 years is not fundamentally very expensive has strong growth potential in this sector and has no negative questions pending then it is worth looking into Options plan. I personally prefer RSUs because of the limited risks in them. Yes, there is more upside in an option because of the number of options issued compared to the number of RSUs for the same plan. For example, Johnson & Johnson gives its employees the choice they want and gives four options for each RSU. I hope this helps explain the complicated bonus plans and which may be best for you. Please contact me with any questions and comments, The Difference Between Stock Options and Restricted Stock Units (RSU) Posted on February 1, 2013 by Rick Rodgers Rick Rodgers, CFP I met with a client recently who had the option of receiving the Equity Share His compensation was given as a percentage of the stock options or restricted stock unit (RSU). An RSU is a grant that is rated in terms of stock holdings, but company stocks are not issued at the time of grant. After the recipient of a unit meets the vesting condition, the company distributes shares or the cash compensation amounts to the number of shares used to value the unit. Depending on the plan rules, the employee or employer may be allowed to choose whether to move to stock or cash. The most important variable is how the appropriate number of options are set on RSUs. RSUs are preferred when the same number of options are offered. However, most companies typically offer one-third to one-fifth the number of RSU shares than they would have granted in options. This is because the options are worthless if the stock price never exceeds the grant price during the vesting period. RSUs have greater downside protection, but they also limit your upside when you have more options than RSU. RSUs are taxed in the same way as actual restricted stocks. There is no capital gains treatment available. Employees are taxed at the ordinary interest rate on the amount received on the settlement date, based on the market value of the share. According to Section 83 (b) Wahl, employees must make payments of unnecessary taxes if the share price falls. The taxation of options depends on whether they are incentive stock options (ISO) or non-qualifying stock options (NQSO). The rules for taxing ISOs are complex, especially for the alternative minimum tax. The tax treatment for NQSOs is relatively straightforward. There are other considerations that make the decision 8211 the waiting schedule, options forfeiture, prospects for company future, whether it is a public or private company. The complexity abounds in an RSU or option decision. Employees who encounter this decision should seek a competent financial advisor. Your money is going to run out of money through retirement nobody wants. But with no goals and a solid plan, how can you know for sure if youre on the right track Will I be able to keep my current lifestyle What will be my monthly income in retirement Can I protect my hard earned savings and still have that Income I want Rodgers & Associates to answer questions like this every day. Share this Print Email LinkedIn ldquoThe Difference Between Stock Options and Restricted Stock Units (RSUs) rdquo by Rick Rodgers is licensed under a Creative Commons license. You are free to share and reproduce this blog post for any purpose and in any way provided you credit Rick Rodgers of Rodgers Associates as the author and Rodgers Associates as the source. Title Creative Commons License times Data Original Title Creative Commons License Read More By Rodgers Associates The One IRA Mistake That Could Your Family Thousands Five Strategies For High Income Earners To Follow With The New Tax Rules Follow The Rules if you have your pension to an IRA