Your Questions, Answered: Restricted Stock Units
On this week’s episode of Your Questions, Answered Graham Butler and Brian Leitner discuss equity compensation, and answer the following question:
“Should I view my restricted stock units that I received from my employer as true compensation or as icing on the cake?”
Do you have questions you’d like answered? Email them to [email protected], and we’ll provide answers.
Brian Leitner: You have questions. We have answers. Back with another quick clip. My name is Brian Leitner and today I’m joined by Graham Butler, a senior wealth advisor in our Atlanta, Georgia office. Graham, how are you doing today?
Graham Butler: I’m doing well. Thanks for having me.
Brian: Thank you for being here. We had a question that came in and it’s from an executive and their question is, Should I really view my restricted stock units, that they’ve received from their company as true compensation or more icing on the cake? I know you work with a lot of executives. What are some of your thoughts?
Graham: Well, it’s a great step in any executive’s career to start earning equity compensation. And we definitely want to view that as part of a comprehensive financial plan for them. And it is a type of a bonus, but really more than anything, we want to be able to integrate that because it isn’t just like cash. There is some complexity that goes along with it.
Brian: So talk to us a little bit about what are restricted stock units. Maybe we start there.
Graham: Yeah, so restricted stock units are a type of equity compensation. Generally, that companies will give to executives that wants to help enhance their earning potential by tying some sort of compensation to the performance of being company’s underlying stock. So essentially, they’re given a grant. Over a certain period of time these awards will vest and place shares of the company inside of a brokerage account in the employee’s name.
Brian: So you mentioned vest. Talk to us about what a typical vesting cycle might be, and effectively what that is.
Graham: Well, the typical investing cycle absolutely depend on the individual company, but it’s generally over some period of time, call it three to five years where there is a scheduled period where a percentage of the granted shares that will have the restrictions removed. They’ll no longer be restricted stock units. They will just be stock that you own outright, and that can be done as quickly as quarterly or more generally, done annually over some period of time, as I said, three, four, maybe five years.
Brian: So what about the taxation of these? Again, it’s a form of compensation. We know there’s going to be tax involved. How does that work?
Graham: Yeah, tax is always involved and it’s a little bit more complex, generally what the companies will do is they will withhold a certain percentage of the shares to pay taxes on behalf of the employee Now, this is done a little bit different because this is supplemental income and not your traditional earned income. So they’re using a supplemental withholding table. And what that generally means is for supplemental income for the employee. The first 1 million is withheld at 22% and anything above a million in one calendar year is taxed at the top tax rate. That’s 37%. So there’s definitely some opportunity there for advanced tax planning and cash flow planning as tax rates vary greatly between that 22% and 37% tax bracket.
Brian: So just to be clear, this is taxed as ordinary income to those individuals, correct?
Graham: Yes, absolutely. And it is taxed when the shares are no longer restricted to the executives. So, that could be one third of the grant after one year as the vestings occur, this is a taxable event.
Brian: Okay. So these are obviously great to have great to be awarded these. what are some of your potential concerns, if there are any, for folks that are receiving these?
Graham: Number one, we just touched on, is making sure you have a plan for taxation. This may require quarterly estimated tax payments. If you’re already in the top tax bracket, and you’re only having 22% withheld on a million dollars, obviously you’re going to be under my belt. So having that ongoing planning to ensure that that is taken care of so there’s no surprises in April of any given year, this can also lead to concentration issues. If you’re getting a lot of awards, they’re starting to vest over the rest of your career, or you have a lot of company shares coming in and you’re already having your salary tied to this one company. You really want to have the ability to take a look at this comprehensively and determine whether or not you have had that many shares or what level of concentration you’re comfortable in having.
Brian: Great points on all fronts. Graham, thanks for sharing your expertise in answering the question, providing some of your own background, kind of what you do. So very much appreciate you being here.
Graham: Oh, anytime. Happy to do it.
Brian: And if you or anyone else has questions they’d like answers to, they can feel free to email us at [email protected]. Thanks for watching.