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. Capital Gains Tax

    A type of tax levied on capital gains incurred by individuals ...
  3. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  4. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  5. Cash Bonus

    A lump sum of money awarded to an employee, either occasionally ...
  6. Performance Appraisal

    An annual review of an employee’s overall contributions ...
Related Articles
  1. RSUs represent an unsecured promise by the employer to grant a set number of shares of stock to the employee upon the completion of the vesting schedule.
    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. Professionals

    What's the average salary of a business operations manager?

    Read about the average yearly salary of business operations managers, and find out which locations and industries offer the best pay for these professionals.
  7. Retirement

    Who is eligible for a Teacher Retirement?

    Learn about the retirement option, the Teacher Retirement System, offered to teachers and other public school employees, and learn eligibility requirements.
  8. Retirement

    What are the benefits and advantages of the Teacher Retirement System?

    Learn about some of the primary benefits of a teacher retirement system and what similarities it has with other types of employer retirement plans.
  9. Retirement

    Are Social Security benefits affected by unemployment benefits?

    Find out if Social Security benefits are affected by unemployment benefits, and if so, how much this benefit can be reduced by this program.
  10. Taxes

    Are fringe benefits direct or indirect costs?

    Learn how to allocate costs associated with fringe benefits provided to employees and how to determine when a cost is either direct or indirect.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center