Most salaried employees know that companies incentivise them for diligent work. It can come as Employee Stock Option Plan (ESOPs) or Restricted Stock Units (RSUs). Understanding how RSUs vs ESOPs compare is important as you can make the most of the shares allotted to you through either of these routes.
ESOPs, or Employee Stock Option Plans, are schemes offered by companies where select employees have the opportunity to purchase company stocks at discounted prices. The purchase price and future exercise date are predetermined.
ESOPs have a vesting period, usually at least a year, during which employees must remain employed. At the end of the vesting period, employees can exercise their options to buy shares if it's financially advantageous. Lower grant prices compared to market prices on the vesting date can make exercising ESOPs profitable.
Say you work in a company that has launched an ESOP with the following particulars —
Being an eligible employee, you receive your 100 ESOPs. And on April 1, 2025, three years from the ESOP issue date, you can choose to exercise your options. If the market price of the company's shares is greater than the grant price of Rs. 200, you can use your ESOPs to buy the shares at a lower price. But if the market price of the company's shares is less than the grant price of Rs. 200, you can wait and exercise your ESOPs later — when the market price increases.
Wondering what the tax implications of holding ESOPs are? Read this blog for a detailed understadning implication of ESOPs.
RSUs, or Restricted Stock Units, are stocks offered by companies as compensation to employees. They have a vesting period, during which employees must hold the shares. After the vesting period, employees can sell the shares for a profit if they choose to. RSUs can be in the form of shares or cash equivalents, depending on the terms of the RSU grant. Time-oriented restrictions require employees to remain with the company until the RSUs are unlocked.
As mentioned above, some RSUs can only be sold after a specific period. Usually, the employee has to remain at the company during the vesting period to unlock the RSUs allotted to them.
Some RSUs come with milestone-based limits, where they can only sell their holdings after achieving a specific company milestone. It encourages employees and acts as an incentive for them to perform better.
Only after the employee has achieved the milestone and a particular vesting period is complete can the RSUs be sold.
Let's say you work as a sales manager in a company that has issued RSUs with the following particulars:
Let's assume that you achieve this sales figure 18 months after you've been allotted the RSUs. You can then choose to hold the stocks or sell them based on the prevailing market conditions.
Although both these kinds of employee-oriented stock issues have many similarities, there are also several differences between ESOPs and RSUs. Check out how ESOPs vs RSUs compare in the table below.
Understanding the differences between RSUs and ESOPs is crucial for employees to gauge if they've received fair appraisals. ESOPs involve the option to purchase company shares at a predetermined grant price, providing potential profits. On the other hand, RSUs are restricted stocks that employees receive as compensation and can be sold after a vesting period or upon achieving specific milestones. While ESOPs offer voting rights and dividend benefits, RSUs do not. These distinctions make it essential to assess how the issuing companies value their employees.
The rate of tax on RSUs is not very high. In case of shares of listed companies, the tax rate is just 15% if the holding period is less than a year. But if the holding period is more than a year, your gains are tax-free.
If the RSUs are from an unlisted company, they are taxed at your slab rate (for holding periods of less than a year) or at 20% with indexation benefits (for holding periods of more than a year).
Restricted Stock Units (RSUs) help boost employee morale and act as an incentive for employees to perform better. And they help employees partake in the results of their hard work by giving them shares of the company, so they can benefit from the stock appreciation and the growth of the company. So, for established companies that have a strong market presence, they are definitely worth it.
The company's financial performance and market conditions are the two biggest factors influencing ESOP/stock prices. Both determine the value of the company and the demand for shares of the company
Opting for ESOPs can be a good idea for employees if they are confident of the company's growth. In case the company gets listed or acquired, ESOPs can provide a significant financial boost to the employee.