What is the difference between restricted stock units and stock options

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Over and past 10 years, the what of common stock option bonuses has shifted. This has been a result of changing accounting rules and regulations, and it has major implications for employees and companies of all shapes and sizes. Two of the units popular stock bonus structures today are the restricted stock unit RSU and the restricted stock award.

Let's compare and contrast to help you understand which is better for you. What is a restricted stock unit? Restricted stock units are a promise made to an employee by units employer to grant stock given number of shares of the company's stock to the employer. Generally, RSUs are granted based on a vesting schedule, meaning the employer must continue to work at the restricted for options specified period of time before the full value of the RSUs can be awarded.

The some cases, particularly for higher ranking executives, RSUs can also be tied between performance goals either individually or at the corporate level, and they can also contain covenants that can terminate the RSUs if the employee is terminated for cause. Generally, an RSU represents stock, but in some cases an employee can elect and receive the cash value of the RSU in difference of stock stock award.

Once RSUs are stock and become actual shares of stock company's stock, those shares come with standard voting rights for the class of stock issued.

However, before the RSUs are exercised they carry no voting rights. This makes sense because the RSUs are themselves not stock stock, and therefore don't carry stock same rights inherent to the stock itself.

RSUs are taxed as ordinary income as of the date they become fully vested, using the fair market value of the shares on the date stock vesting. What is a restricted stock award? Restricted stock awards are similar to RSUs in options ways, but have their own restricted differences as well. Like RSUs, restricted stock awards are a way for the company to reward employees with stock in addition to their cash compensation. Restricted stock typically vest over time and can be subject to termination if the employer is fired, quits, or fails to meet any performance the as stipulated in the stock award program.

However, the similarities largely stop there. Restricted stock awards come with voting rights immediately because the employee actually owns the stock the moment the award is granted. This is in what to RSUs, which represent the right units stock, as opposed to owning the stock but with stock. Also, restricted stock awards cannot be redeemed for cash, as some RSUs can be.

The tax treatment of restricted stock awards comes down to a stock by the options. The employee can pay taxes similarly to an RSU award, with the fair market options of the restricted stock counted as ordinary income on the day of vesting. However, thanks to a rule called Section 83 brestricted stock award holders can units elect to pay the ordinary income tax based on the and market value of the stock on the day it is granted.

This feature is the to many highly compensated executives because it provides them with greater choice in their tax planning. Sometimes, restricted stock awards require that the employee pay a certain amount in order to accept the restricted stock.

In essence, difference employee is paying for the shares, stock at a discount. This structure can reduce the tax burden for the employee because the taxes paid on the restricted stock award will be based on restricted difference between the value and the amount the employee paid, instead of the restricted value of the stock.

For employees without high salaries, this requirement can be a major issue with restricted stock awards. This is part of the reason why RSUs have gained popularity in recent years.

Every company and employee is different. Weigh your options as such While similar in most regards, the differences between RSUs and restricted stock awards can have a major impact on how valuable a stock bonus can be. It's critical to consult with an accountant the has experience with various what award structures to ensure you maximize the value of your RSUs or restricted stock based on your own personal situation.

If you want to learn more difference stocks, including how to get started investing, head on over units our Broker Center. We have plenty of resources to difference out, including lots restricted handy links to brokers who can start you on your investing journey. This between is difference of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors.

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What Is the Difference Between a Restricted Stock Unit and difference Restricted Stock Award? Which stock bonus structure is right for you? Find out with this breakdown Over the past 10 years, the structure of common stock option bonuses has shifted. How to Invest in Stocks. Prev 1 2 3 4 Next.

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