Stock options and restricted shares. The increasing use of Restricted Stock Units (RSUs) has led to a good deal of confusion about their use and how similar they are to stock options.

Stock options and restricted shares

Incentive Stock Options and Non Qualified Options

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Stock options and restricted shares

A restricted stock unit is 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. 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 RSUs, in addition to a generous salary and benefits.

To give Madeline an incentive to stay with the company and receive the shares, it puts them on a five-year vesting schedule.

After one year of employment, Madeline will receive shares; after two years, another , and so on until she has received all shares at the end of five years. 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. However, if Madeline had left the company after 18 months, she would have received only the shares that vested after year one.

She would have forfeited the remaining shares to the company. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.

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