Restricted stock is a type of executive reward that provides non-transferable shares to employees under specific conditions. These conditions, known as vesting restrictions, stipulate that the recipient is required to remain with the company for a certain number of years or until a particular company benchmark has been met before being able to sell or transfer the shares. Restricted stock has become commonplace among established companies who wish to incentivize employees and reward loyalty by giving them a small stake in the company’s equity.
To obtain restricted stock, the company will grant the employee a set number of shares in the company's stock. These shares are typically issued in the employee’s name, although some companies choose to issue them in the name of a trust that holds the shares on behalf of the employee. These shares are usually held in the employee’s name and are then restricted according to the vesting conditions.
For example, if the company requires the employee to remain with the company for four years, the shares would be given to the employee at the start of their employment. During the first two years, the employee would not be able to sell or otherwise dispose of the shares they have been granted. At the end of the two years, the company would release one-third of the shares to the employee, with the remaining two-thirds being unlocked and made available to the employee after their full four-year employment commitment is complete.
Restricted stock comes with significant tax implications for both the company and the employee. From the company’s perspective, the issuance of restricted stock is treated as a compensation expense and reported on the financial statements as such. From the employee's perspective, the income from the restricted stock can have tax implications - depending on the amount of the grant, the employee may be required to pay taxes on the income earned from the restricted stock upon vesting.
Restricted stock provides a great incentive for employees to remain with the company over the long term and encourages loyalty and dedication to the company's mission and vision. As such, many established companies have adopted this type of incentive plan to incentivize and motivate their employees.
To obtain restricted stock, the company will grant the employee a set number of shares in the company's stock. These shares are typically issued in the employee’s name, although some companies choose to issue them in the name of a trust that holds the shares on behalf of the employee. These shares are usually held in the employee’s name and are then restricted according to the vesting conditions.
For example, if the company requires the employee to remain with the company for four years, the shares would be given to the employee at the start of their employment. During the first two years, the employee would not be able to sell or otherwise dispose of the shares they have been granted. At the end of the two years, the company would release one-third of the shares to the employee, with the remaining two-thirds being unlocked and made available to the employee after their full four-year employment commitment is complete.
Restricted stock comes with significant tax implications for both the company and the employee. From the company’s perspective, the issuance of restricted stock is treated as a compensation expense and reported on the financial statements as such. From the employee's perspective, the income from the restricted stock can have tax implications - depending on the amount of the grant, the employee may be required to pay taxes on the income earned from the restricted stock upon vesting.
Restricted stock provides a great incentive for employees to remain with the company over the long term and encourages loyalty and dedication to the company's mission and vision. As such, many established companies have adopted this type of incentive plan to incentivize and motivate their employees.