As a way to compensate employees for their good performance, similar to stock options of the company, employers also grants restricted stock units (RSUs) that is a promise to allot some number of company shares to the company employee at a future date.
Here, there is a clause per se allotment of the shares to the employee who can be given shares or RSUs as and when the candidates join the company but the same will be received after the vesting period is completed.
Conditions upon which RSUs are provided to the employee
- There can be a case in which such allotment is made only when the employee reached some performance benchmark.
- Also without the vesting, the RSUs carry no value and once vesting is completed, the fair market value is assigned to these company stock units.
Example of a company providing RSUs to its employees
Infosys provided RSUs to its employees with the vesting period of 4 years and if these middle level managers reach the performance benchmark and remain with the company then they will receive some number of company shares which can be redeemed at market value for the gains to be realized.
RSUs vs ESOPs
RSUs carrying some inherent value are better as in the case of ESOPs investment has to be made by the employees and it can be worthless in a scenario when exercise price to buy company shares is more than the market price.
What issue of RSUs means for company shareholders?
In case the company in which you hold shares, issues RSUs to its employees to reward their performance directly means an increase in its equity kitty and hence earning per share takes a hit.
Here a point to be noted is that whether the company is floating additional equity for the purpose or is issuing them from some already present equity trust etc.
Disadvantage of RSUs
The RSU owners do not have voting rights nor are they eligible for any dividend payment as the actual share allocation is not made.