Are Restricted Stock Units (RSUs) the right equity vehicle for your compensation strategy? 

As organizations compete for talent while managing costs, RSUs have become a powerful tool in total rewards packages, particularly for late-stage startups and public companies.

RSUs represent a company's promise to grant employees shares of stock once certain vesting conditions are met. Unlike traditional stock options, RSUs offer employers and employees distinct advantages in administration, taxation, and value retention. 

For HR and compensation professionals, understanding how to implement and manage RSUs effectively is crucial for attracting top talent, driving performance, and maintaining long-term retention.

This guide explores everything you need to know about RSUs from an employer's perspective, including implementation considerations, tax implications, and best practices.

What are RSUs? 

Restricted Stock Units (RSUs) are a form of equity compensation where an employer promises to provide employees with company shares based on meeting specific vesting conditions. Consider RSUs as a "promise of stock ownership" that converts to actual shares once particular requirements are fulfilled.

For example, let's say you grant an employee 1,000 RSUs with a four-year vesting schedule:

• Year 1: 250 shares vest (25%)
• Year 2: 250 additional shares vest
• Year 3: 250 additional shares vest
• Year 4: Final 250 shares vest

If the stock price is $50 when each portion vests, the employee receives shares worth $12,500 each year ($50 × 250 shares), assuming they meet all vesting requirements, such as continued employment.Unlike stock options, RSUs always maintain some value as long as the company's stock has value, making them an attractive tool for companies looking to provide meaningful equity compensation while managing dilution and administrative complexity.

How do Restricted Stock Units Work? 

RSUs work through a simple promise: "Stay with us, perform well, and you'll receive company shares." Let's break this down into key components with real-world examples:

‍The Grant 

When you hire Debra as a senior engineer, you grant her 1,000 RSUs. At this point, she doesn't receive actual shares—just the promise of them. If your stock is worth $40 per share, these RSUs have a potential future value of $40,000.The vesting schedule most companies use either.

‍Time-based vesting

‍Example: Sarah's 1,000 RSUs vest over 4 years with a one-year cliff

• Year 1: 250 shares vest (after completing first year)
• Years 2-4: Remaining 750 shares vest quarterly (about 62 shares per quarter)

Performance-based vesting

‍Example: A sales executive receives 500 RSUs that vest when:

• The company reaches $10M in annual revenue
• The individual achieves 100% of sales targets
• Both conditions must be met for shares to vest

The distribution 

‍When RSUs vest:

• Sarah receives actual shares
• The company typically withholds some shares for taxes
• The remaining shares are deposited in Sarah's brokerage account

For instance, if 250 shares vest when the stock price is $50:

• Total value: $12,500 (250 × $50)
• Shares withheld for taxes (22%): 55 shares ($2,750 value)
• Sarah receives: 195 shares ($9,750 value)

As an employer, you maintain control over unvested RSUs: if Sarah leaves before vesting, she forfeits the remaining units. This structure creates a powerful retention tool while offering employees genuine value.

Types and Examples of RSUs 

Here are the main types of RSUs, with clear examples relevant for HR and compensation professionals:

Time-based RSUs (Single-trigger RSUs) 

Time-based RSUs are the most straightforward form of restricted stock units, where vesting depends solely on how long an employee stays with the company. These RSUs follow a predetermined schedule, typically over 3-5 years, and employees must only maintain their employment status to receive the shares. Time-based RSUs are particularly effective for employee retention and are commonly used by established companies looking to provide predictable equity compensation.

‍Example: A tech company grants a developer 800 RSUs with a 4-year vest:

• 200 shares vest after year 1 (25%)
• The remaining 600 shares vest quarterly (50 shares every 3 months)
• If shares are worth $100 each, that's $20,000 value per year

Performance-based RSUs 

Performance-based RSUs link vesting to specific individual or company performance metrics rather than just time served. These RSUs help align directly between employee compensation and business objectives, making them particularly valuable for executive compensation packages and sales roles. The performance criteria include revenue targets, profit margins, customer satisfaction scores, and market share goals.

‍Example: A sales executive receives 1,000 RSUs that vest based on:

• Individual target: Achieving $2M in annual sales
• Company target: 20% revenue growth
• 500 shares vest when the individual target is met
• 500 shares vest when the company target is met

Double-trigger RSUs 

Double-trigger RSUs require two conditions before any shares vest, typically combining a time-based requirement with a specific company event. This structure is particularly common in pre-IPO companies, where the second trigger might be a liquidity event such as an IPO or acquisition. Double-trigger RSUs help companies manage dilution and motivate employees to work toward major company milestones.

‍Example: Example: A startup grants 2,000 RSUs with two triggers:

• First trigger: 4-year time-based vesting
• Second trigger: Company IPO or acquisition
• Even if the time requirement is met, shares don't vest until a liquidity event

Hybrid RSUs 

Hybrid RSUs combine multiple vesting conditions, creating a more complex but highly tailored equity compensation structure. This approach allows companies to balance various objectives, such as retention, performance, and strategic goals, within a single RSU grant. Hybrid RSUs are often used for senior executives where companies want to create sophisticated incentive structures aligned with multiple business objectives. 

‍Example:An executive receives 1,500 RSUs structured as:

• 750 units vest over 3 years (time-based)
• 750 units vest upon hitting specific EBITDA targets
• Must maintain employment throughout both periods

Stock Options vs. RSUs: Which is Better? 

Here's a comparison of stock options vs. RSUs from an employer's perspective:

When to choose stock options?

Stock options are typically better suited for early-stage startups and high-growth companies.

They offer several advantages:

• Lower initial cost to employees and no immediate tax burden
• Potential for significant upside if stock price grows substantially
• Attractive for recruiting entrepreneurial talent who believe in future growth
• More shares can be granted due to lower current value
• Useful when cash compensation is limited but growth potential is high

When to Choose RSUs? 

RSUs are generally better for later-stage startups and public companies. 

‍Key benefits include:

• Simpler to administer and explain to employees
• Retain value even if stock price declines
• More predictable dilution impact
• Clearer tax treatment for both company and employees
• Better for companies with established market value
• Lower risk of underwater equity compensation

Employer considerations 

‍Administrative complexity:

• Stock options require tracking exercise prices, expiration dates, and exercise transactions
• RSUs have simpler administration with automatic vesting and distribution

Cost and accounting:

• Stock options often have more favorable accounting treatment
• RSUs create more predictable expense recognition
• Both require managing tax withholding obligations

Employee understanding:

• RSUs are more manageable for employees to understand and value
• Stock options can be more complex to explain and may require employee education

Company stage impact: early-stage companies:

• Stock options better align with limited cash and high growth potential
• Lower valuation means more units can be granted

Mature companies:

• RSUs provide more stable value
• Better for predictable compensation planning
• It is easier to manage the dilution impact

Match your equity compensation choice to your company's stage, goals, and administrative capabilities. Consider your target talent pool and overall compensation strategy when making the decision. Here’s a quick sneak peek to sum up restricted stock units vs. stock options: 

What are the Tax Implications Associated with Restricted Stock Units? 

Here's a more narrative approach to RSU tax implications in the US:

Tax obligations at vesting 

When RSUs vest, they are treated as ordinary income based on the Fair Market Value (FMV) of shares on the vesting date. As an employer, you must withhold federal income tax, Social Security, Medicare taxes, and any applicable state and local taxes. This is a crucial aspect of RSU administration that requires careful planning and execution.

Employer withholding requirements 

Employers must withhold a statutory federal tax rate of 22% for supplemental wages, which increases to 37% for amounts exceeding $1 million. The standard 7.65% FICA withholding also applies. Most companies use a net settlement approach for tax withholding. 

For example, if an employee has 100 shares vesting at $50 per share ($5,000 total value), approximately 30 shares would be withheld for taxes, leaving the employee with 70 shares.

Employer tax considerations 

Companies can deduct RSU compensation equal to the amount included in employees' income. This compensation must be reported on W-2 forms, requiring careful tracking of both income at vesting and subsequent share dispositions. Proper documentation and reporting systems are essential for maintaining compliance and supporting potential tax audits.

Special tax situations 

Section 83(i) Election offers private company employees the opportunity to defer taxes under specific conditions, though this provision has limited availability and requires complex administration. For multinational companies, cross-border tax obligations create additional complexity, often requiring country-specific withholding procedures and careful coordination between jurisdictions.

Best practices for employers 

Successful RSU tax management requires comprehensive planning and robust systems. Implement clear withholding procedures and consider making quarterly tax deposits for large grants. Provide employees with clear guidance about tax implications while encouraging them to consult personal tax advisors for individual situations. Stay current with IRS regulations and state-specific requirements, maintaining detailed documentation supporting compliance and efficient administration.

This tax management approach helps ensure employer compliance and employee satisfaction with your RSU program.

Pros and Cons of RSUs 

Since we want to give you the accurate picture, here’s a quick analysis of both the benefits and drawbacks of restricted stock units: 

Pros 

RSUs excel at talent retention and motivation 

RSUs provide a powerful retention tool by offering employees tangible value that grows with the company. The vesting schedule creates "golden handcuffs," encouraging key talent to stay while helping attract high-caliber candidates in competitive markets.

Administrative simplicity reduces the operational burden 

Unlike stock options, RSUs require less complex administration and accounting. There's no need to determine strike prices, track exercise periods, or manage complex option exercises. This simplicity reduces administrative burden and potential errors.

Better control over share dilution and planning 

Companies can better manage and predict share dilution since RSUs typically require issuing fewer shares than stock options. The delayed dilution until vesting helps with strategic planning and investor relations.

Market downturn protection keeps compensation stable 

Unlike stock options that can become underwater, RSUs maintain value even in market downturns. This stability makes them reliable compensation tools and helps maintain employee motivation regardless of stock price fluctuations.

Cons 

Tax withholding creates cash flow challenges 

RSUs create immediate tax liability at vesting, requiring companies to manage withholding obligations. This can strain cash resources, particularly for companies withholding taxes through cash payments rather than share withholding.

Limited upside potential in high-growth scenarios 

Compared to stock options, RSUs offer lower potential returns for employees in high-growth scenarios. This might make them less attractive for early-stage companies looking to incentivize exponential growth.

Higher accounting expenses affect financial statements 

RSUs result in more predictable but potentially higher accounting expenses than stock options. Companies must recognize compensation expenses based on the fair market value of grants, spread over the vesting period.

Direct dilution impact requires careful management 

While more predictable than options, RSUs still result in direct shareholder dilution upon vesting. This impact must be carefully managed, particularly for public companies concerned about maintaining optimal share structures.

Consider your company's stage, growth trajectory, and administrative capabilities when evaluating whether these tradeoffs align with your compensation strategy and business objectives.

Manage Restricted Stock Units and Other Long Term Incentives with Compport 

Managing RSUs effectively requires powerful systems that can handle complex vesting schedules, tax implications, and reporting requirements. Manual tracking can become error-prone and time-consuming for compensation teams handling numerous RSU grants.

Compport's Long Term Incentive module streamlines RSU administration with automated vesting schedule tracking, performance-based vesting calculations, and built-in tax withholding management. 

The platform enables HR teams to model grant scenarios, manage exception cases, and generate customized award letters. Managers can access real-time insights into their team's equity compensation, while employees can view their vesting schedules and potential equity value through interactive dashboards.

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For organizations looking to scale their RSU programs efficiently, implementing specialized compensation management software can significantly reduce administrative burdens while ensuring accuracy and compliance.

See Compport in action to know more. 

FAQs 

Is RSU part of CTC? 

Yes, RSUs are included in total compensation (CTC). They represent the potential value of stock grants that vest over time, typically appearing as long-term compensation in offer letters.

What is RSU salary? 

RSUs aren't salary but rather equity compensation. They're stock shares granted to employees that become available (vest) over time, supplementing base salary and other compensation components.

Can I withdraw my RSU? 

You can sell RSU shares once they've vested. Before vesting, they remain restricted and can't be withdrawn, sold, or transferred. Vesting follows your company's predetermined schedule.

Does 1 RSU equals 1 stock? 

Yes, typically, one RSU converts to one share of company stock upon vesting. However, some companies may define different conversion ratios in their equity agreements.

Is RSU good or bad? 

RSUs are generally positive, offering guaranteed value, unlike stock options. They provide direct company ownership and potential growth but create immediate tax obligations upon vesting.