Jul 4, 2020
Written by:
Ella Vincent
Restricted stock units (RSUs) are a top perk for employees. Many tech companies that are growth stocks offer this stock-based compensation once an employee joins a company. In many cases, they are an alternative to stock options similar to ETFs.
In this TradingSim article, I will explain what a restricted stock unit is. Throughout this article, I will also explain which stocks can be added to rebalance portfolios and help their trading strategies because they are profitable enough to offer employees the best RSUs.
When a company hires an employee, at first they may receive the units as part of their compensation. RSUs are grants that are part of stock-based compensation that are equal to the value of a corporation’s common stock. When companies issue the grants, they are based on the value of the company’s stock.
Employers distribute restricted stock units to employees after a vesting period. A vested definition means that an employee will own shares. During a vesting period, a certain amount of time an employee has to work at a company before they receive the shares.
For example, a company can give an employee 2,000 RSUs. If 25% of the RSUs vest each year, after one year, 500 shares will vest. In addition, employees can also receive the shares as cash. Once they vest, an employee can receive sell the shares.
If employees want to donate their RSUs to charity, they can help a good cause– and themselves at tax time. One benefit is that employees can get an itemized deduction that’s equal to the stock’s market value. The second benefit is that employees can avoid capital gains taxes by giving RSU shares to charities.
Double trigger RSUs are another kind of restricted stock unit that employers offer. They are offered by new companies before their IPOs(initial public offerings. Double trigger RSUs are not taxed until they are vested and the companies go public with their IPOs.
Garrett Perez, a CPA, notes that many companies have double trigger restrictive RSUs to protect their workers.
“Most companies who do in fact issue RSUs have this requirement [of double-trigger vesting] as it would be extremely punitive on their employees to have them recognize it as income with essentially no market to sell it in. I’ve never seen a pre-IPO company that does not have the double vesting requirement,” said Perez.
Some employers offer RSUs on a graduated vesting schedule. In that case, the units may vest 10% after one year, 20% after two years, and so on.
Vested schedules for restricted stock units vary in three ways. For example, say an employee receives 120 RSU’s in January 2020. In cliff vesting, workers receive 100% of their benefits after a certain amount of time. In a three-year vesting schedule, an employee receives all their shares in January 2023.
With a graded vesting schedule, a company gives fewer shares of its stock at an annual rate. If there’s a three-year graded vesting schedule, an employee may receive 30 shares of a stock every January until 2023.
In a cliff/graded vesting hybrid, there is a mixture of the two vesting schedules. A company can issue 40 shares of its stock in January 2020. Then, they may issue 3-4 shares a month until the vesting period is over.
Similar to stocks vs. ETFs, RSUs are similar to stock options, but have key differences. In most instances, restricted stock units
In contrast, stock options
In a bear market, restricted stock units can be a safer option for employees. Because stock options are tied to a stock price, a diminished stock price can hurt an employee’s stock options. However, employees take RSUs at a stock’s current market value when they’re vested. At the time the units are vested, they could have a higher value to employees.
Because restricted stock units are different from stock options, they may not reap all the benefits. Since most RSUs vest after five years, many employees may leave their jobs before they enjoy the stock perks. If an employee quits, their former employer forfeits the RSU that remain.
Even if employees stay with a corporation for five years, the value of their RSUs may not be the same after the vesting period. If the stock loses value during an economic downturn, the RSUs may lose value when the employee receives the shares.
In the year they’re vested, RSUs are taxed as income if an employee keeps the units. If an employee sells the units, capital gains taxes will due at the time of the sale. Restricted stock units aren’t tax-free investment expenses. For example, if an employee vested 20,000 shares of a company’s stock at $20, the value of the RSUs will be $200,000. That amount is treated as taxable income by the IRS.
It’s important to have the RSU vested income set aside to pay taxes because tech companies usually may not pay them themselves. The success of tech companies may ironically mean that they don’t make withdrawals for employees.
Corporations usually withhold state, federal, Social Security, and Medicare taxes on RSU’s. The taxes are usually at a flat rate of 22%.
However, because tech companies are often in high tax brackets, a tech company’s workers often have to pay higher taxes on their RSUs. They would often owe more than what employers would set aside to cover taxes.
If an employee wants to take their taxes out before the restricted stock units vest, they can make a special election. The special Section 83(b) election taxes employees before the RSUs vest. The RSUs are taxed as extra compensation.
If employees keep the restricted stock units for more than a year, the RSUs are taxed at a lower rate as capital gains. However, the units are taxed in the year that employees receive them, even if the stock unit declines in value.
There are four main tax withholding methods for restricted stock units.
The cost basis for RSUs is the fair market original value of an employee’s shares on the day that the units vest and they receive the shares. That value will likely never change throughout the vesting period of the restricted stock units. The cost basis usually stays the same. It isn’t adjusted to calculate an employee’s tax calculations unless the unit amount is $0.
All of the corporations below offer generous RSUs to employees. These companies are the top corporations that offer restricted stock units to employees.
During the coronavirus pandemic, Amazon’s (NASDAQ:AMZN) stock soared 68% a year after hitting its rock-bottom low. Financial experts like Wedbush analyst Michael Pachter said the e-commerce boom during quarantine will boost Amazon in the long term.
“E-commerce is likely one of the biggest beneficiaries. E-commerce is likely to see a permanent shift away from offline stores,” said Pachter.
FBN Securities analyst Shebly Seyrafi believes that Amazon stock will continue to rise even if another quarantine happens in the U.S.
“To us[FBN Securities], AMZN[Amazon] is the ultimate ‘stay-at-home stock,'” wrote Seyrafi in a note to clients.
Amazon’s RSUs usually vest after four years. They vest on a 5-15-40-40 schedule. That means that after year 1, the restricted stock units vest 5%. Then they vest 15% the second year. In the last two years, they vest at 40%.
During 2018, Amazon eliminated RSUs for its hourly workers. In exchange for raising the wage of hourly workers to $15, Amazon ended RSUs as part of employee benefits. As noted in a company blog post, Amazon restricted stock units will vest this year, and in 2021. The corporation replaced the RSUs with direct stock. An Amazon spokesperson explained the changes.
“The significant increase in hourly cash wages more than compensates for the phase-out of incentive pay and RSUs,” said the spokesperson.
“We can confirm that all hourly Operations and Customer Service employees will see an increase in their total compensation as a result of this announcement. In addition, because it’s no longer incentive-based, the compensation will be more immediate and predictable,” added the spokesperson.
For salaried employees that still receive RSUs, the units make it easier to buy pricey homes in the company’s home base of Seattle. Diana Bowar, a loan officer at 1st Security Bank, offers restricted unit stock loans to Amazon employees to buy million-dollar homes. Bowar noted that the employees receiving RSUs are more likely to stay in Seattle.
“There’s a need in our backyard. And we’ve seen that people who are getting RSU income and have contracts with Amazon, the likelihood that they’re going to stay in that job making that kind of income is good,” said Bowar.
In 2019, bank lenders usually need employees to show two years of RSU income before they consider restricted stock units as income. Don Zender is branch manager of Evergreen Home Loans and Veterans Lending. He noticed that Amazon employers couldn’t use their RSUs as a down payment on houses.
“But if you start at Amazon, you can’t do that. The biggest hurdle has always been the first couple years,” said Zender.
Many lenders like Evergreen are now open to providing loans to employees with Amazon RSUs.
“Some lenders are starting to say, well, RSUs are not really a one-time thing,” said Steve Geri, a financial adviser at Denny Park Investments in South Lake Union. “They’re a continuing form of compensation in many industries.”
Uber(NASDAQ:UBER) stock recently rose 3% after recent reports it was purchasing food delivery service Postmates. The acquisition would be a welcome addition to Uber’s own food delivery division, Uber Eats. Canaccord Genuity Maria Ripps wrote a note to clients that suggested that Postmates would help Postmates raise Uber’s stock more.
“Postmates should continue to benefit from restaurant selection and strong positions in key markets. However, as the fourth-largest player in the US market, we also see it as a potential consolidation target,” wrote Ripps in the recent client note.
The ridesharing giant has benefitted from being a rideshare leader. Uber CEO Dara Khosrowshahi noted that the company has an advantage over competitor Lyft because of its global reach and diversified businesses under the Uber umbrella.
“We[Uber] are structurally set up more efficiently and more optimally than anyone else to move to profitability. This environment is perfect for us,” said Khosrowshahi.
When Uber first went public in 2019, it detailed in its IPO filing how it would distribute its RSUs.
“As we transition to become a publicly-traded company, we expect that the mix of service- and performance-based components of our equity compensation will shift,” said Uber.
To help us achieve our objectives of rewarding our executive officers for their experience and performance and motivating them to achieve our long-term strategic goals following this offering, we anticipate that performance-based vesting conditions applicable to RSUs granted to our executive officers will become more prevalent,” added Uber.
While Uber’s IPO has been successful, there was an unexpected tax burden to its employees. When the IPO launched, Uber recorded its shares at $45. The company tied the restricted stock unit settlement to its IPO launch in 2019. Uber was optimistic that the stock would rise and give a bigger payoff to employees.
In a letter to employees in May 2019, Uber hoped that the move would “mitigate the risk that the company could be responsible for paying a significantly higher amount in taxes if the stock price increases meaningfully after the IPO.
However, the opposite happened. Uber stock dropped to $23. Because the stock fell, employees have to pay extra taxes on capital losses. If the stock had gone up, Uber and its employees would have had to pay less tax in the long run. Employees at the time noted how the extra tax bill shocked them at the time.
“Word started dripping out to say, ‘Hey, I actually owe quite a bit of money to the government. There was a bit of panic and a lot of anxiety’,” said the former employee.
While Uber offers generous benefits to employees like RSUs, at first, they weren’t implemented with the best advantages to employees. Barbara Baksa, director of the National Association of Stock Plan Professionals, noted that Uber thought its RSUs would rise as its stock was supposed to grow.
“If you think that you’re going to IPO and the stock price is going to continue to accelerate and in six months that stock is going to be worth a lot more, then it would definitely be to the employees’ advantage to have the tax withholding done at the IPO because it would reduce their tax liability and start their capital gains earlier,” said Baska.
Parkworth Wealth Management principal Bruce Barton said that Uber and other tech companies have untraditional ways to compensate employees. Restricted stock units are part of a new compensation package.
“We’re talking about large private companies that got very large, very fast and had to adopt this nontypical way to compensate employees. They’re still experimenting,” said Barton.
Uber offers generous RSUs, but employees must be aware of the possible tax responsibilities they may have when they receive them.
The tech giant’s stock skyrocketed by 46%, during the nationwide shutdown. Credit Suisse analyst Matthew Cabral raised his price target on Apple stock because the company’s App revenue grew 35% over the last few months.
“Despite a slow start, increased screen time amid widespread ‘stay at home’ measures is now translating into a rapid acceleration in App Store revenue,” wrote Cabral in a note to clients.
“We’re[Credit Suisse] encouraged by building App Store momentum, both as evidence of Apple’s ability to increasingly monetize its nearly 1 billion iPhone user base and in support of multiple expansion for the stock as the mix shifts to higher-quality, more recurring revenue,” added Cabral.
Evercore ISI analyst Amit Daryanani also expects Apple stock to rise as customers buy more Apple Watches and other devices.
“We expect wearables and services to sustain double digit growth driven by uptick in [average revenue per user] and better monetization of the install base,” said Daryanani.
Daryanani also expects Apple stock to outperform as the corporation recently announced that it would make its own chips in-house.
“It is encouraging that Apple continues to demonstrate its leading chip design capabilities as in-housing semi design remains key to product margin expansion,” noted Daryanani.
Apple (NASDAQ:AAPL) has a generous restricted stock unit package for employees. The RSUs were implemented by CEO Tim Cook in 2018.
The tech company revealed that it will offer $2500 in restricted stock units to some employees. Cook explained the RSU compensation in an email.
“To show our support for our team and our confidence in Apple’s future, we’ll be issuing a grant of $2,500 in restricted stock units to all individual contributors and management up to and including Senior Managers worldwide. Both full-time and part-time employees across all aspects of Apple’s business are eligible,” said Cook.
While many employees received many RSUs, Cook benefitted the most from restricted stock units. When he reached the five-year mark of leading Apple, he gained 700,000 RSUs as part of a whopping $100 million bonus compensation deal.
Apple RSUs can be beneficial to part-time and full-time employees if they stay with the company for the long haul.
Verizon(NYSE:VZ) offers substantial restricted stock units to employees. The phone company’s early adoption of 5G technology and high-paying dividend make the stock attractive to Goldman Sachs analysts. The analysts rate Verizon as a buy.
“We add Buy-rated VZ to the Conviction List as we see the stock offering investors the most attractive combination of total return and risk owing to its stable wireless business, well-covered dividend (4.6% yield) and strong balance sheet,” noted the analysts.
“We believe Verizon’s financial performance will not be materially impacted by a short-term economic shock. This is because a large majority Verizon’s revenues come from selling wireless connectivity services to consumers and businesses in the US,” added Goldman Sachs.
Verizon’s” Stock Together” program gives RSUs to its employees. Verizon RSUs have a three-year vesting period. On a graded vesting schedule, workers receive one-third of the units on the anniversaries of the date they started with Verizon. In order to receive the RSUs, an employee has to stay through the entire vesting period. If an employee leaves before the vesting period is over, an employee can get the RSUs depending on the reason they left.
In the Verizon RSU program, the amount awarded to employees depends on certain factors. Verizon gives the restricted stock units after dividing the employee’s fixed dollar amount by Verizon’s stock price at the end of the vesting date.
If an employee’s award amount is $3,000 and Verizon’s stock price on the vesting date is $50, the equation is 3,000/50. In that equation, 3,000/50=60. So, a Verizon employee will receive 60 RSUs at the end of each vesting date.
Despite the difficulty banks had during the recession, Bank of America (NYSE:BAC) still had a strong Q1 2020. The bank’s CEO, Brian Moynihan, touted the company’s $22.8 billion revenue.
“Our results reflect the strength of our balance sheet, the diversity of our earnings, and the resilience of our teammates to serve clients around the world. Despite increasing our loan loss reserves, we earned $4 billion this quarter’,” said Moynihan.
During the bull market of 2019, the Bank of America gave 200 to 500 restricted stock units to part-time and full-time employees. The RSUs are for employees that earn between $100,000-$350,000 a year. In this graded vesting period, employees are given the RSUs over four years at the same annual time. Moynihan wrote in a company email about how he wanted the RSUs to lead to employee retention.
“This stock award…will further align the role these teammates play with our continued performance and our shareholders’ objectives,” wrote Moynihan.
Even though the Bank of America is struggling during the global recession, there is still a strong RSU program for employees.
Microsoft (NYSE:MSFT) essentially pioneered the restricted stock unit program for workers. Bill Gates spoke about why he thought RSUs were better options for its employees.
“The fact is that the variation in the value of an option is just too great. I can imagine an employee going home at night and considering two wildly different possibilities with his compensation program. Either he can buy six summer homes or no summer homes. Either he can send his kids to college 50 times, or no times,” said Gates.
“The variation is huge; much greater than most employees have an appetite for. And so as soon as they saw that options could go both ways, we proposed an economic equivalent. So what we do now is give shares, not options,” added Gates.
While Microsoft stock rose 45% after physically closing stores, the company’s stock dipped 2% after permanently closing the stores. Despite the slight decline, Microsoft Corporate Vice President David Porter said the closures signal a more cloud-based system to help customers.
“It is a new day for how Microsoft Store team members will serve all customers,” said Porter. “We are energized about the opportunity to innovate in how we engage with all customers, maximize our talent for greatest impact, and most importantly help our valued customers achieve more,” said Porter.
Despite the drop in Microsoft stock, the Microsoft RSUs are still significant. The restricted stock units are granted every August . After three months, new RSUs are vested five percent over five years. Employees with older grants have them vested 10% every six months in the five year vesting period.
Microsoft’s restricted unit stock system has long been a benefit to its workers.
Starbucks’ growth potential in the next quarter has garnered the attention of financial experts. The investment firm Ensemble Capital, says the coffee company’s stock is a buy. Ensemble Capital is bullish on Starbucks even though many stores were closed during the COVID-19 pandemic. Ensemble Capital believes Starbucks stock can rebound once the economy re-opens this summer.
“Starbucks, which nearly tagged $100 a share over the summer as investors finally realized that the company could return to solid levels of same store sales growth, backed off earlier in the quarter before another strong quarter of same store sales growth in both the US and China reminded investors just how dominant this company actually is,” wrote Ensemble Capital.
Starbucks’ RSU’s are very generous. The coffee giant’s Bean Stock program gives restricted stock units to employees. CEO Howard Schultz increased the benefit in 2016. He touted the plan in a statement.
“Every day, I strive to build the kind of company that my father never had a chance to work for, one that not only cares for its people but gives them opportunities to be their best selves,” wrote Schultz in his statement.
The RSU’s vest over a two-year period. In the graded schedule, 50% of the units vest a year after an employee starts working for the coffee company. After the second anniversary of a worker’s tenure, the other 50% of the restricted stock units vest.
If an employee leaves before all the units vest, all the vested RSUs are for the employees to keep. When there are unvested restricted stock units, they are forfeited once a worker leaves the corporation.
Starbucks’ RSUs pay off for employees in a shorter period of time than other corporations. Schultz has created a restricted stock unit system that greatly helps its employees.
The tech company IBM( NYSE: IBM) saw its stock rise as it bought the tech company Red Hat. Red Hat’s sales increased 18% from a year earlier after the acquisition. Victoria Greene, an analyst with G Squared Private Wealth, rates IBM stock a buy. She praises the company’s focus on cloud-based technology.
“IBM’s AI is leaps and bounds ahead of competitors since they have invested heavily in it for 10 years,” said Greene.
Because of IBM’s strong stock, the corporation’s employees receive restricted stock units over a four-year vesting schedule. The RSUs vest at 25% each year on a graded schedule. The tech company’s CEO, Arvind Krishna, gets a similar deal to his employees. IBM detailed its RSU vesting period.
“RSUs will vest 25% on June 8, 2021, 2022, 2023 and 2024, provided Krishna is an active IBM employee on these dates ( unless certain requirements are met to be eligible for continued vesting. PSUs will be adjusted based on performance and will be paid out in February 2023,” noted IBM in its SEC (Securities and Exchange Commission) filings.
IBM’s graded vesting period enables employees and its CEO to reap many benefits from its compensation package.
A free speech debate is affecting Facebook stock. Facebook stock fell slightly after many companies are refusing to place ads on the social media company’s site to protest a Facebook policy. Facebook won’t take down controversial posts that are considered hate speech or misleading political ads by the companies.
The corporation pledged that it was trying to weed out misinformation on the site.
“We invest billions of dollars each year to keep our community safe and continuously work with outside experts to review and update our policies. We know we have more work to do,” said a Facebook spokesperson.
Despite the controversy, Rohit Kulkarni, executive director at MKM Partners says that the ad boycott of companies like Proctor & Gamble won’t greatly affect Facebook stock.
“Procter & Gamble is the largest advertiser in the world, but we think it accounts for less than 0.50% of FB’s revenues,” said Kulkarni.
Kulkarni agrees with Wall Street’s projections for 7% Q3 2020 growth.
“We believe near-term[Wall] Street estimates are reasonable and that there is upside potential given ad market recovery,” said Kulkarni.
Despite the negative publicity, Facebook’s restricted stock units are beneficial to its employees. In Facebook’s RSU vesting period, the units vest on a quarterly schedule. In the graded vesting period, the employees vest 6.25% every three months. After vesting 25% a year, the RSU’s are fully vested after four years.
After the news that the aforementioned Apple was dropping Intel as a chip maker for its devices, Intel stock dropped. Despite the severance of their relationship, Intel took the partnership ending well.
“Apple is a customer across several areas of business, and we will continue to support them. Intel remains focused on delivering the most advanced PC experiences and a wide range of technology choices that redefine computing,” said Intel in a statement.
Despite the decline, some financial analysts want investors to buy the dip. Goldman Sachs rates Intel as a buy. The analysts say that more use of devices during the nationwide quarantine helped Intel.
“Despite the headwinds related to Covid-19, we are maintaining our estimates as we believe there are multiple near-term positive developments (i.e., potential strength/resilience in the high-end client CPU[ computer processing unit] and server CPU markets given a growing number of people working/studying from home) that could largely offset the headwinds (i.e., weaker consumption and enterprise spending),” wrote the analysts in a note.
The chipmaker’s restricted stock unit program is generous to employees. Intel RSUs distribute on a graded vested schedule. The restricted stock units vest at 25% over four years.
If retirees have unvested RSUs at the time of their retirement, they receive one extra year of vesting. That occurs for every five years of employment with Intel.
Intel’s restricted stock units are beneficial to workers even at the ends of their careers.
Corporations offer RSUs as a way to reward and retain employees. While it may not seem relevant to investors, they are connected. If a stock performs well, they can offer more benefits to employees and investors. With TradingSim charts and analysis, investors can find the best stocks that pay the best restricted stock units to its employees.
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