Also known as restricted securities, restricted stock refers to unregistered shares, the ownership of which cannot be transferred until some conditions are fulfilled. These are commonly awarded to corporate affiliates such as executives and directors. Usually, the conditions include continuous employment for a predefined period, the fulfilment of pre-set performance objectives, and earning per share (EPS) goals.
Following are the key features of restricted securities –
Restricted stock is often issued to directors and senior executives following important corporate events or mergers. Occasionally, these shares might become unrestricted if another corporation acquires a company, and the executive is laid off in the process.
There are two variations of restricted stocks, and they are as follows –
Restricted stock unit or RSU is a promise made to an employee by the company to grant them shares at a predetermined future date. Holders of RSUs do not enjoy voting rights as these are not actual stocks. An employee must exercise RSUs to get the right to these stocks.
Restricted stock awards mostly share similar features with RSUs. A company usually issues these stocks to the employees as a reward. Employees who are granted such stocks are able to enjoy voting rights with immediate effect. Unlike RSUs, The cash value of restricted stock awards cannot be redeemed by the employees.
Employee stock options are a type of incentive compensation that gives an employee the right to purchase shares of the company at a predetermined price within a specific timeframe. Unlike restricted securities, these are mostly issued in start-up companies rather than well-established corporations to keep their employees motivated.
The differences between restricted shares and stock options are given below –
|Point of Difference
|These stocks are a form of employee compensation and thus possess some value, unlike stock options.
|When the market price of a stock is below the strike price during the exercise period, it becomes worthless.
|Restricted stocks are taxed once the ownership is transferred to the employee. The taxable value depends on the market price of a stock.
|Employee stock options are of two types, and they are taxed differently.
|When employees are awarded restricted stocks, they become motivated to achieve long term goals set by the company.
|Stock options make the employees focus more on short term goals that can increase the market price of the stock for short term gains.
Here are some of the advantages of restricted stocks –
Some of the demerits of restricted securities are given below –
Both restricted stock and restricted options serve as extremely useful forms of compensation for employees. The circumstances surrounding both the company and employee should be taken into account when deciding which is better.