18 Oct 2016 12:43 IST

All you wanted to know about restricted stock unit

It is a form of reward offered to an employee where they are promised a grant of the company’s shares at a future date

As the going gets tough, Indian IT software bigwigs are hoping to attract and retain top talent by rewarding them in new ways. After its recent September quarter results, Infosys upped the compensation packages for seven of its top managers and announced the grant of 9.06 lakh restricted stock units (RSUs) and 9.43 lakh stock options to 425 top executives. This is a part of the tech giant’s new gameplan, from April this year, to reduce ‘high performer attrition’ through new employee rewards — like the grant of 24 million RSUs.

What is it?

A restricted stock unit is a form of reward or compensation offered to an employee where he or she is promised a grant of the company’s shares at a future date. While RSUs may be granted to an employee as soon as she joins or attains a certain rank, she will actually receive the shares as per a timetable, called the vesting period.

Therefore, when Infosys granted RSUs to its top-performing middle level managers in June this year, it set a four-year vesting period and offered them at par value. For instance, an Infosys employee with 500 RSUs, if she stays with the company and meets performance parameters, may receive 125 shares in 2017, 2018, 2019 and 2020, all granted at par. Should the Infosys share trade at ₹1,200 next year, ₹1,500 the year after that and ₹2,000 thereafter, the employee will get to cash in on her shares in the market at those prices, pocketing neat gains of ₹1.5 lakh to ₹2.5 lakh in each of the next four years.

Why is it important?

For employees, RSUs offer a more sure-shot bet at pocketing a future reward, than conventional Employee Stock Options (ESOPs). RSUs do not represent a ‘right’ to buy the share at the future date. Instead the employee is assured of being granted the shares. ESOPs can turn out to be worthless if the stock’s market price tanks below the exercise price (the price at which she gets to buy the share in future). But RSUs always carry some value no matter what the share price. RSUs, unlike ESOPs, also do not require the employee to shell out hefty cash to invest in shares of her employer company.

From the company’s point of view, RSUs help retain talent by dangling a future carrot. As RSUs usually vest only when specific conditions on performance and employment are met, this form of reward is paid only when employees actually deliver.

Why should I care?

As HR departments hunt around for new ways to attract high performers without letting their wage bills sky-rocket, RSUs stand out as an excellent way to achieve both. You can expect more and more people-intensive and knowledge-based companies to take the RSU route. Plus, while ESOPs look good on paper, they often fail to translate into real benefits, because future stock prices. Exercise prices for ESOPs which look very attractive in a bull market, may turn out to be quite unattractive in a bear market. With RSUs, yes, the value of your shares can swing up and down, but you will still have something of value at the end of it all.

If you are a shareholder in a listed company, the issue of RSUs may expand the company’s equity base and dilute its earnings per share. But this depends on whether the company is adding to its equity capital for the RSUs. Infosys’ RSUs for example, are being issued out of shares already allotted to the Infosys Employees Welfare Trust.

The bottomline

If you want the big bucks, be prepared to run faster on that treadmill.

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