Restricted Stock Unit

AAA

DEFINITION of 'Restricted Stock Unit'

Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time. The restricted stock units (RSU) are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at any time.

INVESTOPEDIA EXPLAINS 'Restricted Stock Unit'

For example, suppose Madeline receives a job offer. Because the company thinks Madeline's skill set is particularly valuable and hopes she will remain a long-term employee, it offers part of her compensation as 500 RSUs, in addition to a generous salary and benefits. The company's stock is worth $40 per share, making the RSUs potentially worth an additional $20,000. To give Madeline an incentive to stay with the company and receive the 500 shares, it puts them on a five-year vesting schedule. After one year of employment, Madeline will receive 100 shares; after two years, another 100, and so on until she has received all 500 shares at the end of five years. Depending on how the company's stock performs, Madeline may actually receive more or less than $20,000.

The RSUs, thus, give Madeline an incentive not only to stay with the company long term, but to help it perform well so that her shares will become more valuable. In fact, Madeline decides to hold the shares until she receives all 500, at which point the company's stock is worth $50 and Madeline receives $25,000, minus the value of the shares that were withheld for income taxes and the amount due in capital gains taxes. However, if Madeline had left the company after 18 months, she would have received only the 100 shares that vested after year one. She would have forfeited the remaining 400 shares to the company.

RELATED TERMS
  1. Restricted Stock

    Insider holdings that are under some other kind of sales restriction. ...
  2. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  3. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  4. Capital Gains Tax

    A type of tax levied on capital gains incurred by individuals ...
  5. Auto Enrollment Plan

    An employer’s decision to sign employees up to have a percentage ...
  6. Cash Bonus

    A lump sum of money awarded to an employee, either occasionally ...
RELATED FAQS
  1. What are the SEC regulations on exercising stock options?

    The U.S. Securities and Exchange Commission (SEC) generally has limited regulations on the exercise of stock options, which ... Read Full Answer >>
  2. What are restricted shares?

    Restricted shares refer to shares of stock whose sale or acquisition is subject to specific restrictions laid out by the ... Read Full Answer >>
  3. What are employee share purchase plans?

    An employee stock purchase plan (ESPP) offers an incentive for employees to participate in their company's profitability ... Read Full Answer >>
  4. What is Substantial Gainful Activity (SGA) and why is it important?

    Substantial gainful activity (SGA) is what the Social Security Administration (SSA) measures to determine work, income and ... Read Full Answer >>
  5. How does the Affordable Care Act affect moral hazard in the health insurance industry?

    To see how the Patient Protection and Affordable Care Act, or "Obamacare," affects moral hazard in the health insurance industry, ... Read Full Answer >>
  6. What is fiduciary liability insurance, and what are its benefits?

    Under the Employee Retirement Income Security Act (ERISA), any individual who manages a employee benefit or pension plan ... Read Full Answer >>
Related Articles
  1. Options & Futures

    How Restricted Stock And RSUs Are Taxed

    This form of executive compensation limits how these stocks can be sold. Find out more here.
  2. Taxes

    What You Need To Know About Capital Gains And Taxes

    Find out how your profits are taxed and what to consider when making investment decisions.
  3. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  4. Taxes

    Cut Employee Stock Option Taxes With AMT Credit

    Learn how refundable AMT credits can help you save on taxes, AMT bills and more.
  5. Bonds & Fixed Income

    Accounting and Valuing Employee Stock Options

    Learn the different accounting and valuation treatments of ESOs, and discover the best ways to incorporate these techniques into your analysis of stock.
  6. Personal Finance

    The 6 Biggest Fortune 500 Employers

    In 2015, five of the top six biggest Fortune 500 companies are retailers.
  7. Entrepreneurship

    Top 10 Jobs That Allow You to Work From Home

    Here are some top careers where you'll find work-at-home job opportunities.
  8. Entrepreneurship

    Work-From-Home Scams: How to Avoid Them

    Learning when a lucrative opportunity is – and isn't – legitimate.
  9. Entrepreneurship

    The Pros & Cons of Working from Home

    Look before you leap into the ranks of employees who work from home. There are pros and cons you need to check out thoroughly before taking the plunge.
  10. Entrepreneurship

    Employment Negotiations: What To Ask For & How

    Improving their first offer: What you should know

You May Also Like

Hot Definitions
  1. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  2. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  3. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  4. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  5. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  6. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!