With Parag Agrawal becoming the CEO of the social media giant, Twitter, Indians have been abuzz with excitement. One of the trending Google searches showed Indians frantically trying to find out the IIT Bombay pass out’s salary. With him taking home a whopping $1 million per annum, he will also receive Twitter’s Restricted Stock Units (RSUs) amounting to $12.5 million. These RSUs will then vest in 16 equal quarterly increments, each being 6.25% of the grant, starting February 1, 2022.
Restricted Stock Units (RSUs) is a type of compensation issued by the employer to the employee in the form of company shares. These RSUs are subject to a vesting schedule that is determined based on performance and the tenure of employment as set by the employer. This predetermined amount of time lets the employee hold on to the company shares however, only gains full ownership of these RSUs upon the completion of the said vesting period. After which, the employee is free to sell these shares for a profit. However, unlike normal shares, RSUs have no tangible value until and unless the set vesting period is completed.
Issuing Restricted Stock Units to employees is one of the most common ways of motivation. A vesting period for these company assets is designed by companies to retain talent and ensure that employees stick around for a certain amount of time.
During the time of issuance, RSUs do not become the employees’ rightful asset till the completion of the vesting period. This makes these Restricted Stock Units not taxable income as they aren’t owned by the employee just yet. Upon meeting the vesting requirements, be it performance-based, or time-based, these RSUs are transferred to the employee, making them liable for income tax deductions.
Companies that offer RSUs as a part of their compensation package often attract and retain talent better. With performance-based vesting schedules, companies also see enhanced motivation among employees that ultimately lets them perform better too.