They say you can’t catch a fish without bait. It’s an idea that many business owners have taken to heart. Many companies give their employees equity compensation. It’s one of the best ways to get and keep talented professionals.
There are many equity-based compensation strategies. Many companies offer stock options, equity grants, and performance shares. They also offer restricted stocks. The latter is one of the most popular options. This article will discuss what restricted stock is and its pros and cons.
Understanding Restricted Stock
Restricted stock refers to a share of ownership subject to limitations. These shares are company executives, directors, and other employees. The stocks are often offered as part of their compensation package.
Restricted stock comes with limitations. The relevant Securities and Exchange Commission policies establish these restrictions. The limitations often relate to a vesting period. Stockholders cannot sell or transfer their shares during this time.
Restricted stocks are different from stock options. Companies give the former outright but they put conditions. For example, the employee must meet a specific target first before he or she can get their share. The latter gives employees the right to buy company shares. Businesses offer these to their employees at a predetermined price.
The Mechanics of Restricted Stock
When an employee receives restricted stock, they become the owner of the shares. The company can get the shares back though. Business owners can do this if the conditions they made are not met. The most common condition is a vesting period. This means the employee must stay with the company for a specified period. He or she will get full ownership of the shares afterward.
Companies can also demand that a worker meets a criteria. This is often connected to their work performance. Many employers do this to make sure the worker contributes to the company’s success.
Pros of Restricted Stock
Restricted stock is a popular incentive option. Many top companies are offering restricted stock units or RSUs to their best workers. It’s because restricted stock comes with various benefits.
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Ensures an Alignment of Interests
Restricted stock helps align employees and shareholders. Giving employees shares in the company fosters a sense of ownership. It also ensures their commitment to the organization’s long-term goals.
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Great Retention Tool
A powerful retention tool is the vesting period of restricted stock. It gives employees an incentive to stay with the company. They have to remain for a specified duration to realize the full value of their stock.
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Effective Performance Incentive
Many companies add a performance-based criterion to their restricted stock. This encourages employees to strive for excellence. They will also contribute more to the company’s performance. This drives growth and profitability.
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Streamlined Structure
Restricted stock is a more straightforward compensation model. It’s the opposite of stock options, which have complicated valuation models. They also have challenging tax implications.
Limitations of Restricted Stocks
Restricted stock isn’t perfect. There’s a downside to this option. Employees must recognize these limitations.
- Tax Consequences: Taxing restricted stock can become complicated. Its tax implications vary due to several factors. The vesting schedule is one such factor. Whether the shares are subject to forfeiture also affects the tax structure. Employees must talk to tax experts. These professionals will help them understand the tax consequences of restricted stocks.
- Lack of Liquidity: Restricted stock is liquid once the shares are already vested. Employees must be ready to hold onto their shares. They have to wait until the stocks become unrestricted. This can take years.
- Risk of Losing Stocks: There’s a risk that employees will lose their restricted stock. This can happen if they leave the company before the shares vest. This possible loss emphasizes the importance of understanding the conditions for restricted stocks.
Providing Premier Shareholder Solutions
Legacy Stock Transfer is the country’s top full-service stock transfer agency. Our company offers premier shareholder solutions for investors and issues. We specialize in customized stock transfer agent services. We do direct registration and restriction removals. Our company also offers DWAC and FAST services.
We also issue corporate stock certificates and replace lost ones. Our team of expert transfer agents can help streamline your company processes. They can automate tasks and improve shareholder relationships. Why don’t you give us a ring at 972-612-4120? Let’s talk about how we can work together.