Question

Corporate executives are often offered incentive compensation in various forms. Stock options are probably the most notable, but other forms include; restricted stock shares, restricted stock units and stock appreciation rights. In your opinion which of these forms of compensation best aligns the interests of management with the interest of shareholders? Justify your answer.

Answer 1

For Corporate executives and other senior level executives, equity compensation is a key part and often the most important part of their compensation package. For many senior executives, equity means stock options or restricted stock. But in many circumstances the better choice is RSUs, restricted stock units.

RSUs are most useful in mature companies where the CEO or Corporate executive takes a position where stock has considerable value, but growth is still expected in the public company or perhaps an IPO or liquidity event is not far off. In that circumstance, the key advantages of RSUs is that taxation would be put off until vesting has occurred and the company would typically pay for or assist in payment of the taxation that would arise, and is willing to do so because vesting has already occurred.

RSUs are even more valuable to the CEO or senior executive when he or she takes over in a turnaround situation in a mature company where there is no assurance of appreciation and the CEO needs assurance of a floor in his or her equity value. RSUs also offer a clear advantage over stock options to CEOs and Corporate executives because RSUs after vesting always retain some value. RSUs effectively have a floor on value. They can never go underwater and become worthless as often happens with stock options.

This article discusses RSUs, what they are, how they differ from other forms of executive equity compensation, how they are taxed, and circumstances where obtaining them make the most sense for the executive and can also offer key benefits to the company issuing them. This article also discusses the merits of RSUs when issued by private companies, including early stage, mature and pre-IPO, and also by public companies.