Restricted Stock Units (RSUs)

Definition

Restricted Stock Units (RSUs) are a form of employee compensation that gives workers the right to receive company shares once certain conditions, such as a vesting period or performance targets, have been met.

What it means

Companies use RSUs to reward, retain and motivate employees by giving them an ownership interest in the business. Unlike stock options, RSUs have value as long as the company’s shares have value and do not require employees to purchase the shares.

Employees do not own the shares immediately. Instead, the shares are awarded once the RSUs vest according to the terms of the compensation plan.

How RSUs work

• A company grants a set number of RSUs to an employee.
• The RSUs vest over a specified period or after certain performance goals are achieved.
• Once vested, the employee receives the shares or their cash equivalent.
• The employee can choose to keep or sell the shares, subject to any company restrictions.

Example

An employee receives 1,000 RSUs with a four year vesting schedule. After one year, 250 RSUs vest and the employee receives 250 company shares. If each share is worth £40, the vested shares have a value of £10,000.

Why RSUs matter

• Help companies attract and retain talented employees
• Align employees’ interests with the company’s long term success
• Provide employees with the opportunity to benefit from future share price growth
• Often form a significant part of executive and technology sector compensation packages

Important to note

In many countries, including the UK, employees may be liable for income tax and National Insurance contributions when RSUs vest, and capital gains tax may apply if the shares are sold later at a higher price. The exact tax treatment depends on individual circumstances and local tax rules.

In practice, Restricted Stock Units are one of the most common forms of equity based compensation, giving employees a direct stake in their employer’s future success while encouraging long term commitment.