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The Difference Between a Restricted Stock Unit & Restricted Stock Award

Original post by Will Gish of Demand Media

Restricted stock is sometimes known as restricted securities.

Employers offer a variety of compensation schemes to employees, including those involving stock. Among the compensation schemes involving stock is restricted stock, which generally comes in one of two forms, restricted stock awards and restricted stock units. Although almost identical, two key aspects differentiate restricted stock awards from restricted stock units. One of these differences, which relates to methods of taxing restricted stock, stems form the other, which relates to granting and vesting methods.

Restricted Stock

Restricted stock constitutes shares granted to a company employee as a bonus. Unlike stock options, which employees must exercise in order to own and sell, restricted stock usually comes as a free award. Companies promise employees the delivery of restricted stock at a later date in order to promote long-term service with the company. For example, your employer may promise you a bonus of 100 shares of restricted stock in five years time. Once you get your shares, you can do with them as you please.

Granting and Vesting

Restricted stock arrives in two phases, granting and vesting. When a company grants restricted stock, it promises you the delivery of shares at a predetermined date. The stock vests when the date arrives and the shares pass into your possession. When you receive a restricted stock award, your company offers you shares at the time of the grant, although you cannot access those shares until vesting. When you receive restricted stock units, the company promises to give you a certain number of shares at a future date, but you don’t own those shares until vesting. The promised shares are called units, hence the term restricted stock units.

Restricted Stock Units

The IRS allows for special tax provisions on some restricted stocks. If your company grants restricted stock that qualifies under IRS section 83(b), you can elect to pay taxes on the stock upon granting or vesting. If the value of stock rises between granting and vesting, and you pay taxes upon granting, you can save substantial tax revenue. This tax privilege only applies to restricted stock awards. Because you receive no actual stock with a restricted stock unit upon granting, you can only pay taxes on these shares upon vesting.

Restricted Stocks, Phantom Stocks and Stock Options

Restricted stock units are similar to phantom stocks. Another employee compensation program, phantom stocks constitute the promise to pay a bonus at a future date of equal value to a set number of company shares. Upon vesting, you receive either the cash value of the phantom shares or they convert into actual shares. When phantom shares convert into actual shares, they differ from restricted stock units only in name. Restricted stock awards differ significantly from phantom stocks because you actually own shares upon granting, you just can’t access them. In this respect, restricted stock awards resemble stock options although they usually don’t require exercising.

                   

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About the Author

Will Gish slipped into itinerancy and writing in 2005. His work can be found on various websites. He is the primary entertainment writer for "College Gentleman" magazine and contributes content to various other music and film websites. Gish has a Bachelor of Arts in art history from University of Massachusetts, Amherst.

Photo Credits

  • John Foxx/Stockbyte/Getty Images

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