Smart Compensation: The Benefits of Restricted Stock Units and Performance Shares

In the world of employee compensation, Restricted Stock Units and Performance Shares are increasingly gaining interest as they offer significant advantages over traditional employee stock options. These forms of compensation are not only easier to manage but also less complex tax-wise and are often better aligned with earnings. Nevertheless, employee stock options represent an important source of wealth for many households. For those who receive them as part of their compensation, it is worthwhile to understand their mechanism both in general and concerning specific company policies. When employees receive stock options, they can exercise them at a later date at a predetermined price—the so-called exercise price. A practical example: if Sharon received 100 stock options from her employer in 2014 with an exercise price of $10 per share and the stock rises to $20 by the end of 2023, she could benefit significantly. Given the difference between her $1,000 exercise price and the $2,000 value of the shares upon exercise, she has different strategic decisions: holding in anticipation of higher price gains or immediate sale to realize profits. The tax implications are crucial when choosing between incentive and non-qualified stock options. Non-qualified stock options are taxed as ordinary income upon exercise. Incentive stock options, on the other hand, offer the advantage of lower capital gains tax for long-term holding. Regardless of the type of option, having a large stock package from the employer always carries the risk of economic dependence on the company's performance. Balanced diversification suggests selling the shares when possible, without ignoring tax aspects or potential undervaluations of the company.