Many employees earn compensation in ways other than traditional salary. One such way is through an employer provided equity compensation plan. One of the most common plans to reward employees and align their efforts directly with the success of the company is a Restricted Stock Unit Plan. This plan provides employees with grants of units that vest to become company stock over time in accordance with a pre-established schedule. It is essentially a continuous bonus plan in the form of company stock.

Restricted stock units (RSUs) are units - not stock. They represent a promise by the issuing company to ultimately transfer stock to the unit holder once they are fully vested.  They can be granted to employees, directors, contractors, etc. RSUs are not to be confused with Restricted Stock, which is a similar yet different form of equity program. Once an RSU vests there is no choice for the individual holder to make or additional action required. At vesting, the RSU simply converts into actual company stock which is immediately owned by the individual. Under normal conditions the stockholder may be able to do with that stock as they please, but certain executives and other employees can have limitations on their ability to transact in the newly received stock.

While this added bonus structure is attractive for many employees, it is important to understand there is no “free lunch”. Upon vesting a taxable event has occurred, and therefore the now stockholder will have an income tax liability.  The amount of income to be recognized is equal to the fair market value of the company stock when it vests. Further, the income is considered to be ordinary compensation income because the RSU holder has effectively received stock without ever having had to pay to acquire it. Paying tax on the value received establishes the taxpayer’s cost basis which will then become essential in determining the gain or loss when the stock is eventually sold. A common approach to pay the tax is that the issuing company will withhold a proportionate amount of shares at the time of vesting that have a value equal to an appropriate withholding amount. The result is the RSU holder will have less shares, but their income tax liability with respect to the vesting event may be covered without them having to think twice.

concentration risk

One common result for those that receive RSUs from their employer is that in time they may have a highly concentrated position in the stock of their company. Everyone is busy, and if you are a key employee at a company that pays RSUs, it can be easy to accumulate a large position over time without even realizing. While many people are passionate about where they work, it can make sense to diversify out of these positions through a thoughtful selling plan.

The longer someone holds their company stock and the more units that vest, the higher the likelihood they will have a highly concentrated position with a large unrealized gain built-in. The higher the gain, the harder it can be to sell the stock because of the less-than-attractive tax consequences. This then becomes a balancing act weighing tax and risk management tradeoffs, as having too much exposure to a single company can be quite a risky proposition as no company is immune to market movements.

At Hudson Oak Wealth we have experience managing concentrated stock positions that have resulted from equity compensation programs, from both a wealth and tax perspective. While RSUs are some of the most basic equity compensation awards, they can accumulate to result in significant risks over time if not properly managed. We can assist in balancing the competing investment, tax and risk management concerns are inherently tied to these items. We are able to design and implement customized divesting plans that consider these factors while working towards an end result that builds into your financial plan. The value of having a proper plan in place that makes sense, and then executing on that plan, can make all of the difference.

If you have questions about your RSUs or other company stock compensation programs, please reach out and we’d be happy to see how we may be of assistance.

Disclosure: (“Hudson Oak”) is a registered investment adviser in the State of New Jersey. For information pertaining to Hudson Oak’s registration status, its fees and services and/or a copy of our Form ADV disclosure statement, please contact Hudson Oak. A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest. This article contains content that is not suitable for everyone and is limited to the dissemination of general information pertaining to Hudson Oak’s Wealth Advisory & Management, Financial Planning and Investment services. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this presentation will come to pass. Nothing contained herein should be interpreted as legal, tax or accounting advice nor should it be construed as personalized Wealth Advisory & Management, Financial Planning, Tax, Investing, or other advice. For legal, tax and accounting-related matters, we recommend that you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized planning from Hudson Oak. The content is current only as of the date on which this article was written. The statements and opinions expressed are subject to change without notice based on changes in the law and other conditions.