In Depth
Restricted stock units are a form of equity compensation that entitle the executive to receive actual shares of company stock upon vesting. Unlike stock options, RSUs always have value as long as the stock has any price above zero, which makes them a more reliable form of compensation from the executive's perspective. A typical RSU grant vests ratably over three or four years, for example, 25% per year, meaning the executive must remain with the company to receive the full award. This time-based vesting creates a retention incentive. When RSUs vest, they are taxed as ordinary income based on the fair market value of the shares on the vesting date. RSUs have become the most common form of equity compensation for S&P 500 executives, often constituting 40-60% of total compensation. Companies favor RSUs over stock options because they are simpler to understand, easier to value, and less dilutive on a per-share basis. However, critics argue that RSUs provide less performance alignment than options because they retain value even when the stock price declines. To address this concern, many companies pair time-vested RSUs with performance-based share units (PSUs) that vest only if specific financial or stock-price targets are met, creating a balanced equity program that rewards both retention and performance.