Explain like I'm five: Why do companies give such a chunk of compensation in RSU? How much are they really worth?

Pitney Bowes λ
Jun 26, 2018 32 Comments

Why do a lot of tech companies give a significant portion of compensation in RSU? What are the pros and cons of RSU vs base?

I have an offer with high TC (166) but lower base (105) and another offer that has just a high base 141 with no bonus, equity, etc.

I know everyone here focuses on maximizing TC. However is that always the approach that leads to the most money in your bank? For example I know that equity is taxed at a higher rate than base salary. I'm very confused with how much liquid, disposable income each of these offers will result in after taxes

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TOP 32 Comments
  • Microsoft going tohe
    let’s say a company has a choice of giving a $1,000 cash bonus versus giving 100 RSUs at a market price of $10. Which is “cheaper” or is it the same?

    From an accounting perspective, the cost is the same since the vesting is immediate—i.e., $1,000 is recognized by the company under both scenarios by recording a debit to compensation expense—but the corresponding credit is different. To avoid getting too technical with the accounting (which I could get wrong since I’m not an accountant), think of it this way: the cash bonus reduces the amount of cash on hand while the RSU grant results in the company issuing 100 new shares, thereby diluting existing shareholders.

    If the company wants to conserve cash and doesn’t expect shareholders to be concerned about the dilution, then granting RSUs is, in that sense, “cheaper” for the company. But if the company is trying to hit a specific earnings per share target, the number of shares (the denominator in the EPS calculation) just went up, meaning earnings per share just went down.
    Jun 26, 2018 1
    • Microsoft Meh_Meh
      RSU shares could be newly issued but could also be from the own shares the company has in its portfolio (eg Microsoft owning MSFT shares). For the rest I believe you’re correct.

      You also need to remember that most stock plans vest in multiple years, so from a cash flow perspective (though not from a P&L one) the company is better.

      Lastly, RSU is an incentive for good employees to stay longer.
      Jun 26, 2018
  • Defers pay, makes you feel part of company, allows pre IPO to defer pay even further, ties you to a vesting schedule aka golden handcuffs
    Jun 26, 2018 1
    • Also may create a cult following who HODL re: Enron
      Jun 26, 2018
  • Facebook / Eng
    fb2017

    Facebook Eng

    PRE
    Google, Oracle
    BIO
    worked at Oracle, then Google, now Facebook.
    fb2017more
    Why everyone says rsu has higher tax than base salary? They are same, no difference.
    Jun 26, 2018 1
    • Microsoft Sct909
      It feels like more cuz more is held by employer but returned next tax filing, so yes essentially the same
      Jun 26, 2018
  • Pitney Bowes λ
    OP
    So let's say the company's stock price tanks. Does that effectively mean that your compensation just tanked?
    Jun 26, 2018 4
    • Yup.
      Jun 26, 2018
    • Oscar / Eng
      tc/gtfo

      Oscar Eng

      BIO
      Hi. I am real and I am pretty friendly. Just here for some happiness.
      tc/gtfomore
      I thought RSU is locked at a price. $50000 rsu is $50000 isn’t it?
      Jun 26, 2018
    • Microsoft JDwb49
      Yes. But it also removes the question "The company is getting lots of profit and the share price is rising. Why am I not getting a share of those profits?".
      Jun 27, 2018
    • Oscar / Eng
      tc/gtfo

      Oscar Eng

      BIO
      Hi. I am real and I am pretty friendly. Just here for some happiness.
      tc/gtfomore
      Right. Although I think some companies often both, stock option and rsu.
      Jun 27, 2018
  • Amazon Jexx
    Being literally invested in the company encourages different and more long term planning.
    I’m fairly senior and can say this is a good idea in my experience. Around 80% of my TC has been from stock for years. Think about how that may influence people, especially if it doesn’t vest quickly.
    Jun 26, 2018 3
    • This goes both ways BTW, you work hard company stock tanks, also end up quickly losing all your hardworkers
      Jun 26, 2018
    • Google fried🐙
      That’s why they give you more at current price. If whole economy bad you won’t have a lot of choice anyway (like 2008). When the stock rebounds you have a lot of money. Voila.
      Jun 27, 2018
    • Amazon Jexx
      @nomadmonad - That depends on their policies. For example, Amazon has a policy of “making whole“. If they gave you a certain number of RSU’s for 2019, expecting a particular target compensation, and the stock underperforms, then the next year they give you more stock to make up for that.
      They don’t want people fleeing if the market turns south.
      Jun 27, 2018
  • Pitney Bowes λ
    OP
    Also, how do I estimate how much I'll have after all taxes? I can't seem to find a clear explanation on how to figure this out that takes RSUs into account
    Jun 26, 2018 2
    • Google fried🐙
      For a public company it’s just ordinary income. But valued at the time of vesting. So make some kind of projection for future stock value if you want to model it out.
      Jun 26, 2018
    • TI / Product IOlOl0
      Ya whatever year it vests in it just counts as normal income. The value of RSU’s is if the company stock price shoots up such as amzn, aapl, nvda, and the FANG stocks in general. 50k of nvda stock granted 2 years ago would be worth close to 300k today once it’s all vested
      Jun 26, 2018
  • Pitney Bowes λ
    OP
    I'm a fresh college grad btw if that makes a difference or helps explain why I'm so clueless
    Jun 26, 2018 0
  • Twitter / Eng T Rex
    If you expect stock to go up, RSU is better. It is as though you bought all that stock today without having to put up the capital upfront.

    Tax is the same - RSU vs Cash.
    Jun 26, 2018 8
    • Twitter / Eng T Rex
      You get cash at the same time in both cases? RSU vest & sell vs Cash compensation. What am I missing? (If vest is every 3 months, then you get cash 2 months early, yes)
      Jun 30, 2018
    • Facebook / Eng
      mrballz

      Facebook Eng

      PRE
      Microsoft
      mrballzmore
      Say you work at a company, and for 2018 your comp is
      A) 320k base
      B) 160k base and 160k RSU

      Let's just look at the different part, 160k base vs RSU.

      On Jan 2019 in case A you already got all that 160k, some of it almost a year ago.

      In case B you just got your 160k grant and you will see the first 1/16th of it in there months and need to wait four years to get it all.

      Capisi?
      Jun 30, 2018
    • Twitter / Eng T Rex
      Two cases here (a) 1 year cliff (b) no cliff.

      (a) Your model is accurate for the first year only.
      (b) Second hand info: most companies are moving to this model. I believe Facebook already has this model
      Jun 30, 2018
    • Facebook / Eng
      mrballz

      Facebook Eng

      PRE
      Microsoft
      mrballzmore
      So what happens next year that changes things?

      My model did not have a 1 year cliff, where did you see that?

      If you get cash then if you really think your company's stock is the best investment, you can just buy that and you will be exactly where you would if you got RSUs. Do you agree? Yes or no? If not, please explain.

      Now, if you agree, do you also see that with cash you have the option to find a better investment, so you could potentially do better than RSU?
      Jun 30, 2018
    • Twitter / Eng T Rex
      The second point below is intersting, I think you are focusing on the first.

      1) If vesting schedule is per quarter, then the difference in when you get cash in hand is about 1.5 months early (cash vs vest with immediate sell).

      2) At vest time the stock may have appreciated - that is why you opted RSU to begin with. You don’t have to spend any money to get this gain.

      You can estimate the value of (2) by looking up call option price with strike price on grant date, with expiry on different vest dates.
      Jun 30, 2018
  • Pitney Bowes λ
    OP
    So base salary is preferable to RSU. So for my offer with 105 base and 166 TC, would it be advisable to attempt to negotiate my base up even if it comes at the expense of TC? (this is bay area btw)
    Jun 26, 2018 1
    • Depends on if you think the company is going to go up or down. It's a cheap way to get stock, and also the only possible way to get preIPO stock if you care.
      Jun 26, 2018
  • Amazon Amzlzombie
    They’re banking on you not realizing some of the non-liquid comp (RSU’s) rather than give you money that immediately hits the books (cash comp).
    Jun 27, 2018 0
  • Facebook / Eng
    mrballz

    Facebook Eng

    PRE
    Microsoft
    mrballzmore
    In case of a publicly traded company, for the employee, same amount of cash is better than RSU because you get the cash right away while you get the RSU later in installments.

    There is also a risk that your RSU will not perform as well as some other investment that you could have bought with your cash.

    If you think your company's stock is the best possible investment you can have, then it is a wash as you can just buy that stock with your cash.

    For pre-IPO companies it is a different matter.
    Jun 26, 2018 0

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