Restricted Stock Unit

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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.

BREAKING DOWN '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.

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