Restricted Share Units (RSUs) as an alternative mechanism to Stock Options and Phantom Shares
Employee incentive plans are a common instrument in companies, aimed at recognising the contribution of certain key people in the process of development and growth of the entities. Thus, these plans are remuneration instruments that grant their beneficiaries economic and/or political rights.
Usually, these incentive schemes are linked to the granting of Stock Options or Phantom Shares. However, there is an instrument that combines both mechanisms: the so-called Restricted Share Units (RSUs).
How do Restricted Stock Units (RSUs) operate?
RSUs consist, like Stock Options, of the delivery to the beneficiary of a certain number of shares or equity interests in an entity, subject to compliance with a number of requirements, milestones and vesting and vesting periods.
Thus, as we mentioned in previous blog posts, Stock Options grant a call option right on these shares or shares under advantageous market conditions. However, in any case, the beneficiary must pay the amount equivalent to this acquisition, so there must be an effective disbursement (or compensation linked to a liquidity event). Phantom Shares, on the other hand, grant their beneficiaries the economic rights attached to the units or shares delivered, but without formally acquiring the ownership of such securities, and their delivery is usually free of charge, so that the beneficiary does not have to make any payment.
Thus, in the case of Stock Options, the actual delivery of the units or shares takes place, whereas in the case of Phantom Shares it does not, and only the right to the cash return linked to their grant is granted.
RSUs therefore operate as an intermediate instrument, as the beneficiary effectively acquires the shares or equity without having to make the corresponding disbursement, although his or her voting rights are usually restricted, at least partially. The granting of RSUs to a beneficiary is, as a general rule, free of charge for the beneficiary, but the beneficiary acquires the status of a partner or shareholder with limited voting rights.
As with Stock Options and Phantom Shares, RSUs will be subject to certain vesting, vesting and exercise conditions, and it is common for vesting periods to be longer than for other compensation instruments due to their characteristics.
What are the tax and labour implications of Restricted Share Units (RSUs)?
For the company granting the RSUs, the delivery of the shares or units will be a deductible expense at the time they are actually delivered to the beneficiaries, but no accounting provision may be made for these amounts at the time they are granted. In addition, upon delivery, the entity must apply the corresponding withholding tax.
For the beneficiaries, the delivery of the shares or holdings will be considered as employment income in kind and, if certain requirements of the applicable regulations (Personal Income Tax Act) are met, certain exemptions or reductions may be applied, which must be assessed according to the specific characteristics of the remuneration plan.
From the point of view of employment, the payment will result in the imputation of this remuneration in the applicable contribution base, pro-rated during the months in which the beneficiary’s entitlement is consolidated.
For more information about the tax implications of Stock Options and Phantom Shares, please visit the following post by Devesa.
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