Employee equity compensation in the form of restricted stock units (RSUs) is given by employers to their staff. They stand for the right to receive shares of the employer’s stock at a later time, frequently after completing specific requirements, such continuing employment or performance benchmarks. RSUs are often granted outright to the employee, with no purchase necessary, in contrast to stock options, which grant the holder the right to purchase shares at a certain price. They are referred to as “restricted” because they are unable to be transferred or sold before the limitations have been abolished. The RSU is converted into a specific number of shares of stock upon vesting, making the employee a shareholder in the business.

A grant agreement or award agreement is often where the parameters of RSUs, such as the amount of units granted, the vesting schedule, and the transferability restrictions, are laid out. The vesting schedule may be based on performance-related milestones, such as hitting specific revenue or earnings goals, or it may be based on time, such as vesting over a number of years. Depending on the conditions of the grant agreement, the employee may be able to sell or transfer the underlying shares once the units have vested and become his or her own property.

When RSUs vest and the employee owns the underlying shares, they are regarded as a type of taxable income. Taxes on the fair market value of the shares at the time of vesting will be due from the employee. Taxes may also need to be withheld by the firm at the time of vesting.

Depending on the accounting standards applied, there are various ways to account for Restricted Stock Units in the company’s financial statement. However, in general, the business will record an expense on the grant date for the fair value of the RSUs and modify it over the vesting period to reflect the award’s service condition.

By providing employees with a stake in the company’s performance, restricted stock units allow businesses to balance the interests of employees and shareholders. They can also be a valuable form of pay for employees, giving them a direct financial stake in the success of the business and the chance for share values to rise.