Fondos.Net - Restricted StockUnits

Restricted StockUnits

Restricted stock units are becoming more and more popular with both the issuing employers and the employees to whom they’re given. Some very significant employers are either already giving restricted stock to their staff instead of stock options or are actively considering so doing. These companies include titans in their fields such as Amazon and Microsoft. Restricted stock is usually restricted by the date at which it can realized or sold. It’s considered a far better motivation than a stock option for a couple of reasons. In the first place, employees don’t fully understand the concept of a stock option - they don’t realize that they have to do something to realized their gain. Similarly, they quite often think that they’ve got to pay for the stock they’re offered under the option arrangement.
With restricted stock units, it’s easy enough to undersigned that there’s a date involved. Most employees will appreciate that they can’t do anything with their issue until the date the restriction expires - it’s a simple enough concept. On a financial level the restricted stock issue has a more tangible benefit - a restricted stock issue can't lose its entire value like a stock option can. Even if the stock price falls, restricted stock will still hold some of its intrinsic value. A stock option grant with a strike price of $10 has no value a all when the stock trades below that figure. Restricted stock awarded when trading at $10 is still worth $8 if that’s the market value.

The stock option will have lost its total value whereas the restricted stock has only lost 20% of its value. One of the more important advantages restricted stock has from a management point of view is that it’s better at motivating employees to think and act like owners of the business. When a restricted stock award vests, the employee who received the restricted stock becomes a stock holder of the company - this happens automatically, the employee needs take no action in the matter. As a stock holder, this employee can now attend the annual meeting and vote!
Ownership of part of the company is a powerful motivating tool in trying to get employees to take the company's objectives on board - it makes them more focused on meeting goals. Stock options, on the other hand, do little or nothing to instil a sense of ownership or loyalty. They’re viewed by most as a high risk gamble that has a potentially great reward. An individual may very well invest a couple of years helping a company grow and prosper when compensated for that time by stock options. However, their loyalty is to raising the stock price so they can sell the stock and make money - they have no loyalty to the company or its future. Often, they will choose actions which raise stock price in the short term, thus increasing their potential gain, rather than taking a longer-term view that will genuinely help the company in the long term.

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