Restricted Stock Units (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. 

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.