Restricted Stock

Definition

Restricted stock refers to shares of a company that are granted to an employee as part of their compensation package but have certain limitations or vesting schedules. These shares can’t be sold or transferred until certain conditions are met, usually involving a specified period of employment or performance milestones. If these conditions aren’t met, the company usually reserves the right to buy back the shares at their original price.

Phonetic

The phonetics of the keyword “Restricted Stock” would be: rɪˈstrɪktɪd stɔːk.

Key Takeaways

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1. Vesting period – Restricted stock usually refers to shares of a company that are issued to an employee with a vesting schedule. The shares are actually owned by the employee at the issue date, but they can’t sell or transfer them until the vesting criteria are met.
2. Tax implications – The employee can be taxed at the time of grant, if they choose, or at the time of vesting. This can have significant income tax implications depending on the value of the stock and the time of election.
3. Reward for loyalty – Restricted stock is often used as a reward for employee performance and to keep valued employees with the company. If an employee leaves the company before all their restricted stock vests, they usually forfeit the unvested shares back to the company.

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Importance

Restricted stock refers to shares of a company that are granted to an employee but come with certain conditions attached, typically in the form of a vesting schedule, which adds a layer of security for the issuing company. The importance of restricted stock lies in its role in motivating and retaining employees, as it encourages long-term loyalty by allowing employees to benefit from company successes through direct ownership, but only after they’ve fulfilled their time or performance obligations. It also aligns the interests of the shareholders and the employees, helping to create a unified goal of company success. Therefore, the use of restricted stock can be a strategic move for corporations that want to incentivize and retain talented staff.

Explanation

The primary purpose of restricted stock serves as a form of incentive or compensation for an employee’s long-term dedication and commitment to a company. It is primarily used as a motivational tool for employee retention, given that the stock comes with specific conditions restricting the recipient’s ability to sell or transfer the stock until certain criteria are met. These criteria may include a certain period of employment or the achievement of performance milestones. The utilization of restricted stock in a company’s compensation package benefits both the company and the employee. From the company’s perspective, it aligns the interests of the employee with the company’s success since the stock’s value is directly tied to the company’s performance. From an employee’s perspective, restricted stock provides an opportunity to participate in the company’s growth and potentially earn a significant payout once the vesting period has been completed. This creates a vested interest for the employee to contribute towards the company’s success and stay with the company for a longer period.

Examples

1. Microsoft Corporation: In the 2000s, Microsoft made a notable shift from using stock options as a major component of employee compensation to using restricted stock instead. The company gave restricted share units to their employees that would vest over a period of time, providing a long-term incentive for employees to contribute to Microsoft’s growth and success.2. Facebook: Prior to their initial public offering (IPO) in 2012, Facebook issued restricted stock units (RSUs) to their employees. These RSUs converted to common stock following the company’s IPO, providing a substantial financial boon to a number of Facebook’s employees.3. Starbucks Corporation: Starbucks has a Bean Stock program where they offer RSUs to eligible employees. The program grants stocks that are vested over a two year period as a form of incentivizing and retaining their employees. The eligibility and number of shares are often determined by the employee’s job role, length of service, and location.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Vesting Schedule
• Grant Date
• Equity Compensation
• Securities and Exchange Commission (SEC)
• Employee Stock Ownership Plan (ESOP)

Sources for More Information

• Investopedia
• Fidelity
• Harvard Law School Forum on Corporate Governance
• Morgan Stanley