United States: There's A Difference Between Restricted Stock And Restricted Stock Units

Restricted stock and restricted stock units (RSUs) -- they're the same thing, right? This is one of the most common misconceptions about these equity vehicles. Actually, use of these two types of equity grants could lead to very different outcomes for both the grantor and recipient.

As many organizations seek to improve their "pay-for-performance" compensation philosophy, they often create long-term incentive plans that allow executives and employees to earn additional compensation in the form of equity. Typically, equity is earned though the achievement of organizational and/or individual performance goals or through remaining employed with the organization for a specific period of time. If planned correctly, these plans will allow organizations to attract and retain organizational talent while allowing executives and employees to share in the organization's success.

Restricted stock and RSUs are two of the most common equity vehicles today. Restricted stock is an equity vehicle that transfers the stock to the recipient on the date of grant subject to certain vesting restrictions. Unlike restricted stock, the key difference is that RSUs are not an actual transfer of stock on the grant date but rather a commitment to transfer stock or cash equivalent once vesting conditions are met. Below are other important differences between the two equity vehicles:

Section 83(b) election

Another difference between restricted stock and RSUs is the ability to make an 83(b) election. An 83(b) election is available for restricted stock but not for RSUs. An 83(b) election allows recipients to recognize ordinary income on the restricted stock transferred at grant, rather than recognizing income when they vest. This would allow for the recipient to receive favorable capital gain tax treatment on any gains that arise subsequent to the grant date. However, if a recipient makes an 83(b) election but ultimately does not vest, the recipient is not allowed a tax deduction for the income that was recognized in connection with the 83(b) election.

Recipient taxation

Another key difference between restricted stock and RSUs is the taxability of the grants to the recipients. As discussed above, the taxability of restricted stock depends on whether an 83(b) election has been made. If an 83(b) election is made, the recipient is subject to ordinary income tax on the fair market value of the restricted stock on the date of grant. The recipient is subject to capital gain or loss treatment when stock is sold. If no 83(b) election is made, the recipient is subject to ordinary income tax on the fair market value on the vesting dates. The recipient will receive capital gain or loss treatment upon selling the stock for any changes in value subsequent to the vesting dates.

For RSUs, the taxability depends on whether the units are settled in cash or stock. If the units are settled in stock, the recipients recognize ordinary income at the fair market value on the date the shares are transferred to the recipient. The recipient would receive capital gain or loss treatment upon selling the stock. If the units are settled in cash, the recipient recognizes ordinary income in the taxable year in which the participant actually or constructively receives the cash payment.

Corporate deduction

The last key difference between restricted stock and RSUs is related to the corporate deduction for these equity vehicles. Generally, restricted stock grants are deductible in the taxable year that contains the end of the calendar year when the recipient claims the income as compensation.

For RSUs, the deductibility depends on whether the units are settled in cash or stock. If the units are settled in stock, the deduction is based on when the stock is transferred to the recipient in accordance with the grantor's normal method of accounting. This also applies if the units are settled in cash within 2 ˝ months of the end of the grantor's tax year in which the services were performed to earn the compensation.

If the units are settled in cash, but not within 2 ˝ months of the end of the grantor's tax year in which the services were performed to earn the compensation, the deduction occurs in the taxable year in which the payment occurs.

Next steps

Organizations considering granting restricted stock or RSUs should think about the following when identifying the right grant type for their organization:

  1. What are goals the organization would like to achieve by granting equity to employees or service providers?
  2. What stage is the organization at in its growth life-cycle?
  3. Who would the organization like to grant equity to (i.e., all employees, executives, other service providers, etc.)?
  4. Is the Section 83(b) election an important feature to the organization and the recipients? Do the recipients understand the risks of an 83(b) election?
  5. Does the organization want the option of settling the grant in cash rather than stock?
  6. What other equity vehicles are available to the organization? Are restricted stock or RSUs the best options?

Deciding what type of equity plan to provide to your employees or service providers is a "facts-and-circumstances" decision. Organizations in different industries and at different points of their corporate life-cycle will have different scenarios to consider.

Ultimately, no matter which incentive vehicle is chosen, it is important that the plan would incentivize employees or service providers in helping the organization achieve their long-term goals, which aligns with the "pay-for-performance" compensation philosophy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.