Your Life Simplified

RSUs, Restricted Stock and Restricted Securities

October 19, 2023

As an executive, you probably have some type of restricted stock or security in your compensation. But what is right for you and your portfolio? Steve Moyer, vice president of executive compensation & corporate offerings, joins our host, Valerie Escobar, senior wealth advisor, to sort through the noise of executive compensation and explain RSUs, restricted stock and restricted securities.


Valerie Escobar: If you’re an executive, there’s a good chance you’ve got a restricted something or other. When we are looking at executive compensation, there’s a lot of different types of executive comps, and we want to make sure that we have the right ones when we are having a discussion and planning it out. Join us today as we sort out the noise.

I am Valerie Escobar, Certified Financial Planner and senior wealth advisor with Mariner. You’re listening to Your Life Simplified, and I am joined today by Steve Moyer, VP of Executive Compensation and Corporate Offerings. Steve, thanks for being here.

Steve Moyer: Thanks for having me. I’m excited to be here.

Valerie: Okay. I hope that’s true. You have a lot of knowledge in your head, and we’re going to try and get it all out of you.

Steve: Sounds great.

Valerie: Okay. So first of all, we are talking about, like I said, a lot of restricted things. Who does this conversation really even apply to? Like who should be worried or concerned about this?

Steve: Well, restricted stock, at least in the area that I work most frequently, impacts primarily employees as well as employers.

Valerie: Mm-hmm.

Steve: There is another term that’s kind of confusing, restricted securities, and I think we’ll talk a little bit about that. But for the most part, when we talk about restricted stock, it’s a form of compensation that companies pay to employees.

Valerie: Okay, perfect. So let’s throw out that first one that you were saying really, restricted shares, restricted securities. That’s kind of not relevant to this conversation because we really want to focus on executive compensation. Is that right?

Steve: That’s right. And the thing that makes it confusing is sometimes people use the same words but mean something totally different. So the first one, a restricted security, that’s what I call it just to help differentiate. What we’re talking about is the fact that stock, to be sold on a public market, need to be registered first. And so if they’re not registered, there’s certain restrictions in place that the SEC would put on them where shares can’t just simply be sold to another person if they haven’t been registered first. So those restrictions are legal restrictions that are placed upon the shares. Restricted stock, and there’s two main forms that we would talk about, but in the realm of the employee compensation, there’s restricted stock awards and restricted stock units. And the restrictions that are placed on those are placed on them by the company, because the company is trying to achieve certain things, not by the SEC.

Valerie: Okay, perfect. So we’re going to throw those two out and we’re going to just focus on restricted stock units and restricted stock awards. Both are form of compensation, right?

Steve: Yes.

Valerie: And so we get a paycheck, maybe you did get a bonus for doing something really great. Now let’s say your company wants to tie your work to the performance of the company, right? So RSUs, RSAs are a way to do that, right?

Steve: They’re one of the ways to do that. That’s right.

Valerie: Okay, perfect. So lots of terminology around these. I guess maybe let’s just start talking about why is that attractive to an employee?

Steve: Yeah. So from the employee’s perspective, it helps them to have more skin in the game, so to speak. And so there’s incentive to see the company do well, because as the company does well, the stock price ideally does well also. So it goes up in value, which means that the employee’s compensation can increase because that part of their compensation, when we’re talking about restricted stock and restricted stock units, the value of that compensation is based on the price of the stock. So as the stock does well, so does the compensation goes up. So it’s important from that aspect.

Valerie: Okay, cool. So we work for company ABC, they give us 1,000 RSUs of company ABC, right? What happens next?

Steve: So with the restricted stock… they are different. Restricted stock awards are a little bit different than restricted stock units.

Valerie: Right.

Steve: But for the most part they function very similarly. So for now let’s just, maybe if it’s okay, assume that they’re kind of one and the same.

Valerie: Yup.

Steve: All right. So an employee works for ABC, and ABC pays them their salary, they pay them an annual bonus, and then they pay them in the form of restricted stock. And the restricted stock is not available on day one most of the time, and the employee would have to remain employed for a certain amount of time. And as they remain employed, as time passes, these restricted stock become vested.

Valerie: Mm-hmm.

Steve: And when that vesting event happens, now those shares are actually owned and the employee can do something with them. So they could choose to sell those shares and generate cash to live off of those proceeds or use for something else, or they could choose to continue to hold the shares if they think it’s a good investment choice.

Valerie: Perfect. Okay, and so we get the stock when it vests, which is really when I own that, that’s when we get taxed, right? There’s always got to be a tax component to it. How is it taxed?

Steve: Yeah. So I like to say with restricted stock, there’s two main decisions somebody would need to make. The first is what I would call tax planning, and the other is around share sale planning. So taxation, there’s tax reduction strategies and then there’s tax preparation. And what I’d like to talk about first is tax preparation.

So restricted stock is taxed as ordinary income. The amount of ordinary income is based on the value of the shares on that vesting date, we’ll assume that’s the taxable event, and it’s taxed as W-2 income. Now it’s reported on the W-2, but it is supplemental wages. Why that’s important is most companies withhold on supplemental wages at a different rate than what they withhold on normal salary. And the default for most companies is 22% on the first 1 million of supplemental wages, and then 37% on supplemental wages over 1 million. So what I see quite frequently is where somebody has a salary, a bonus, and then they have a fairly significant amount of awards vesting in one calendar year, and the company withholds taxes, they think that enough taxes have been withheld, they don’t realize that it’s not withheld at the same rate as their normal paycheck, so to speak. And so when they go to file their taxes in April they’ve realized that there was underwithholding. And so when it comes to tax planning, we want to understand how it’s taxed, but also understand that there’s some tax planning often that has to go along with those events.

Valerie: Okay, perfect. And so just to throw numbers with it, I get paid $200,000, I have $50,000 worth of our restricted stock units or rewards that vest in this calendar year, tax year, whatever. And I have to add that $50,000 to my regular $200,000. They usually withhold 30%, we’ll say, on my regular income, but then on my RSUs, they only withheld 22%…

Steve: 22. Sure.

Valerie: …is the normal. So the problem there, we might end up with less withholding than we had wanted.

Steve: That’s right.

Valerie: Right. Okay. So one of the considerations is making sure you’re accounting for that.

Steve: That’s right. Yeah. So what we like to do as a best practice is after the vesting event happens is let’s review the confirmation statement. Because on that confirmation statement we can see exactly how many shares vested, what was the value and so therefore what was the amount of ordinary income recognized, and then we can also see how much tax was withheld from a federal level, state and local. And we can see all of those details on a confirmation statement. What we would do is compare that to our tax projections to determine if there was under-, or in some cases over-, withholding. But we don’t see that too frequently.

Valerie: Yeah, yeah. People aren’t… Well, yeah, that’s another conversation. I was going to say free loan to the government, do I want to use my money now?

Okay, perfect. And so another little trick to this planning is that we get these shares, it’s taxed at ordinary income, let’s say that for some wonderful reason, the shares when they’re issued to us is worth 10 cents, and then when they actually vest they’re worth $20. What would be a suggestion if you had somehow known the future? But what would be something that we could do? Like if we had RSUs and versus RSAs, what could we do in that situation, that grant?

Steve: So this is where they are different and the differences do matter. So a restricted stock award is the actual, at the time of grant, shares are actually granted to an employee.

Valerie: Mm-hmm.

Steve: Now until the vesting occurs and those restrictions are lifted, so to speak, those shares are generally held in an escrow account. So shares are issued to an employee, the employee just can’t sell them yet. But it’s actual property that is granted to an employee, so they receive dividends on those shares, they can vote on those shares oftentimes, and then when the vesting happens, those shares are available to sell. A restricted stock unit is a little bit different in that a restricted stock unit is a promise, a promise to deliver value in the future based on the value of the stock at that point in time. So it’s not actual shares that are granted, there is no property granted, what’s granted or issued is a promise.

Valerie: Mm-hmm.

Steve: So if we back up, restricted stock awards are governed by Section 83 of the code, which I know is a technical thing, but all that means is that governs taxation of property that’s issued to somebody in exchange for services rendered. One of the elections available to restricted stock awards only, not restricted stock units, is what we would call an 83(b) Election. And within 83(b) Election, somebody can choose to be taxed on the value at the time of award rather than at the time of vesting. So in your example, I think you used 10 cents per share.

Valerie: 10 cents per share, right.

Steve: So if they filed an 83(b) Election, they would pay ordinary income on 10 cents per share at the time of award, rather than paying ordinary income on $20 per share at the time of vesting.

Valerie: Right.

Steve: That’s only available to restricted stock awards.

Valerie: But there’s a similar strategy if we have restricted stock units?

Steve: So restricted stock units, again, to get a little technical, governed by Section 409A of the Code which governs deferred compensation. That means that compensation that’s not received today, but received in the future. Restricted stock units have the possibility, if the company allows, for employees to make a deferral election. In other words, they can choose to defer receipt of those shares until a time later than the vesting date. So if somebody was still working, let’s say they have very high income, they’re later in their career, retirement’s around the corner. They may say, “Well, I would rather pay taxes on ordinary income on those shares after I’ve retired and maybe they’re in a lower tax bracket, rather than while I’m in the middle of my peak earning years.” And if the company allows, they may actually be able to defer the receipt of those shares, and so therefore defer the taxation of those shares until a later time.

Valerie: Okay, perfect. So the moral of the story is there’s a lot of tax strategy that’s available. And I think, too, when we’re talking about terms, we need to have our terms defined. And so I think a lot of times what I, and you tell me because you worked a ton with executives as well, is, “Bring me your documents. Let me look at it. Let me see exactly what it is we’re dealing with, and then we can build a strategy around it.” Would you agree?

Steve: That’s right. Yeah. So the details matter a lot, and those details are found in the stock plan documents. And so as a best practice, what I prefer is to review the documents. A lot of times, like we talked early on about how some phrases are used interchangeably, I’ve seen stock plans that use the language of a restricted stock award. So initially I would think, “Oh, that’s an RSA.” But when you read through the details, you realize they’re really defining a restricted stock unit. So if we try to make decisions on them believing they are RSAs, but in reality they’re RSUs, that can lead to several different decision trees, so to speak. And so we might handle them a little bit differently. The key point is the details matter, and those details are in the stock plan documents.

Valerie: Perfect. And I think one last thing really quickly before we wrap up. When these things vest, so we have that they belong to us. It’s a forced event, so we don’t get to decide whether or not… I mean for the most part. If we deferred it. But normally we receive them, they’re due. Do we keep, do we sell? Super quickly, what do you think?

Steve: Sure. Well, yeah so that would be the share sale planning. So my preference for most people is to consider selling the shares as soon as possible after they vest and they’re received. And I would say at least enough shares to pay the underwithholding on the tax, but ideally all of the shares. And the reason why I’ve drawn that conclusion is I’ve seen a lot of folks who have received shares over their entire career, so over the course of 20 or 30 years, and it can get to the point where they have a very high concentration risk in one particular company. And while it’s done well for them oftentimes, it is harder to address that concentration risk on the backend. And so one of the strategies to avoid that is to plan to sell the shares as soon as possible.

Now there are a couple reasons I can think of why somebody might consider holding the shares longer term. One is because they have to. Some people have holding requirements where they just can’t sell the shares right away. The other would be because it’s a good investment opportunity. In other words, it’s very likely that the company will outperform the markets as a whole. Now I would say, we want to tread lightly there. We don’t want to hedge on the side of speculation.

Valerie: Right, yeah.

Steve: But there are times where it seems pretty clear that the company has a pretty high probability or likelihood of outperforming the market as a whole, and in those cases, I’m okay with taking a longer position.

Valerie: Perfect. Yeah. And I think that was the right answer. Thank you. I like to always say that when somebody has an RSU, which is what I most commonly deal with, when it vests you’re getting compensation. It’s kind of like you’re getting paid X amount of dollars, and then I decide now I’m going to go and buy that stock. Is that what you would’ve done with your money anyways? Right?

Steve: Right.

Valerie: And so, I think that’s where I really like to lean. And then we’ll try and detach our emotion about our company, because we all love our company the best, and then really look at it a little bit more objectively.

So Steve, thank you for joining us. We have so many more topics that we want to discuss regarding executive compensation, so we hope you join us in the future. You’ve been listening to Your Life Simplified. Be sure to like and subscribe wherever you are listening, and we will catch you next time.

The views expressed in this podcast is for educational purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal, legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information.

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