Tens of millions of Americans get up every day to join in the rush to the office. Some commute to small office ecosystems or family businesses, others still will punch in at large corporate campuses and attend sprawling meetings all day long. Millions of those employees are traveling to startups, incentivized by the prospect of a grand payday on the horizon. But cash infusions are not limited to Silicon Valley tech geniuses. In fact, the concept of an employee incentive scheme began in the 1800’s with the Illinois Central Railroad Company. These employee benefit plans extend to workforces around the country, and chances are you have encountered the concept in your workplace, too.
Whether you are working long hours to build a new business or well established in a blue chip enterprise, you have surely been offered either performance based or time lapse incentives – or maybe a combination of the two. As well, you are probably as new to the structure and features of these incentive plans as the vast majority of your coworkers.
Bonuses like these are often structured as equity in the company, or cashed out of it and paid out in two main forms: stock options and restricted stock units. If you are new to the corporate world you may have never encountered either term before. Rest assured, you are not alone as restricted stock use is somewhat limited and many employees who could benefit from them are not offered this payout scheme or don’t have any concept of the difference these could make in their financial lives. But the distinction is significant and worth exploring. Once uncovered, many contract negotiations begin with an internal debate: stock options vs rsu disbursement. Which of the two maximizes benefits for your financial future?
On the surface, these compensation vehicles appear fairly similar, but that couldn’t be further from the truth. Stock options are a vested right to purchase shares in the future at a special price set today. Restricted stocks, on the other hand, are granted shares or cash payments promised today and disbursed at a specified future milestone. Stock options carry a weighty upside, and if the price of the stock rises, you may be in store for a healthy payday. However, the principal benefit of rsu compensation that outstrips option vesting is the security they provide. Restricted stocks retain their value no matter what happens in the market. Stock options are only valuable if the value of the company is rising. While rsu’s provide a safety net that guarantees your bonus—a feature not present with options payouts— there are a few caveats to consider. While the potential for no benefit is always looming with options, the possible benefit is miles ahead of the safer option. Options vestments often come in larger packages and can cost you less in taxable income in the long run, meaning that your potential return is valued much higher that with restricted stock units. However you are running the risk of buying stocks at a discounted rate by today’s standards, but when it comes time to execute those options the price has dropped through the floor. This means you are actually paying a premium for a less valuable and potentially bearish stock.
Employee incentives in the form of stock options or restricted stock investments are an ingenious method of promoting workplace happiness and inadvertently paying dividends for a workplace that makes working hard its work. An office that exceeds its goals every quarter is likely to drive stocks higher. If those employees are shareholders as well, it benefits them twofold. If you are offered an incentive scheme, make sure you understand what you are being offered. Are you given the choice to buy shares in the future at today’s price, or is your boss extending free shares to you in exchange for your hard work? No matter how your company chooses to repay your loyalty, it is your responsibility to understand your benefits to ensure the best for your financial future.