Many companies are very creative and do great work, bringing value to that of their customers, their employees, and of course, their shareholders. Some companies are even creative with their compensation, opting to not just pay with money (the fiat legal tender kind) but with other machinations that ultimately are less useful than money, understanding them is what you can do to ensure that you make the best choice for yourself and your money.
When we talk about compensation for time worked, it typically has a non-monetary portion to it, vacation days, sick leave, insurance, corporate benefits, the list goes on. What’s left is typically related to money. I say related to money as it can be a direct cash salary, restricted stock units, actual stock, stock options, discounted stock, assets held in trusts/escrows, or alternative assets.
I’ll talk about each type and their pros and cons and hopefully at the end you will be able to make an informed choice (if and when you are given it) on your current or future employment compensation options.
A direct cash salary is simply, cash that is transferred to you. Whether it is cash that is paid directly, or via a cheque, or if it is transferred directed into your bank account. Any complexity arises from the frequency of this transfer. Some are bi-weekly, and some are monthly. Some companies add a little extra bonus once a year. Some have multiple cycles of bonuses. Cash allows you to do the most with it, and for myself, I always prefer to have regular cash instead of a yearly bonus. You’ll prefer the flexibility of not having your ‘expected money’ locked up for 12 months, and also having regular income is easier to budget for. If I was given a choice between having more money monthly or having a lump sum at the end of the year, I’d always pick the monthly option.
Restricted stock units, or RSUs, are potential stock units that are granted but are restricted for a period of time. PSUs are another type of RSUs but are restricted based on performance metrics such as revenue or signing targets but can be considered in a similar way. For example, for RSUs, an employer may want to incentivize you to stay for 3 years, and so sets up an RSU that is worth say 10-15% of your annual salary that has an annual 33% vesting. What this means is that each year, on the vesting date, part of that restricted stock units is converted into actual stock units and given to you. Depending on your tax laws, you may potentially be taxed at the value when the stock is vested and transferred to you. The negative side of RSUs is that while their value may be calculated years in advance, for example in 2019, your company may decide that they would like to give you an RSU of $10,000 vesting 100% in 1 year. 2020 arrives and the company’s stock nosedives, now it is worth $8,000. Congratulations, your award is now worth $8,000.
What if it goes up? You might ask. It could potentially recover to $10,000 in another year, or it could even surpass the initial value and rise to $12,000. Sure, it could, but are you interested in taking that risk? Leaving the money in a high interest rate account or in municipal/government bonds can much easily earn you relatively risk-free interest. Or investing it in another company that is lower risk may yield a risk that you may be more comfortable with.
When family or friends ask me about whether they should opt in to these compensation methods, my advice is simple. If you received $10,000 in cash, would you spend it all in your current company’s stock? If you would, maybe take the stock units, if not, you should just take the cash. Do note that this is more the case for publicly trading companies. If your company is pre-IPO, you will likely have little or no other way to purchase the company’s stock. In this case, the question you should ask yourself is slightly different. Would you invest your own money, if given the chance, in the company? If so, go ahead and choose the stock units, if not, you know what to do. Another consideration of pre-IPO firms is that you may not be given the opportunity to sell. This means your money can potentially be locked up for years (if you are lucky) or you will never have a chance to cash out.
Actual stock awards are basically an award of actual stock that can be sold on a stock market. From what I gather, this is less common, but you can consider this the same as a cash bonus. If you are getting them for a sign on bonus, an annual bonus, or a discretionary bonus, you can decide whether to sell them directly and have little to no discrepancy between the taxed amount and the value of your stock.
Stock options, which are different from stock units, are basically just the option of purchasing your company’s stock at a particular price (strike price). For these, they may have a zero value depending on the value of your company’s stock. For example, if your company’s stock price is current $10 per stock, and you have been issued options to purchase 200 stock at $10, this is essentially a price ‘lock in’. If the options are immediately vested, good, now you can decide if you want to purchase the stocks or not (this is often used for pre-IPO companies so this is likely your only chance to buy in). If the options have a vesting cliff of say 1 year, then you only have the ability to buy them in 1 year’s time. If the stock price is now $15, congratulations, you have just gained an extra $5 per stock of value, albeit unrealized until you are able to sell them. If the stock price is now $5, however, your option is now what many call ‘not in the money’, and it has no value in itself. So, you are essentially out of luck.
In Jan 2024, Lazada employees that got laid off will get their RSUs voided for joining competitors, the RSUs would be voidable even though they had vested, as it was no possible for the employees to sell them on the open market. Guess what, the “bonus” is now a shackle, and even when it was a layoff, the company has continued power over its ex-employees. A scary thought indeed.
Regardless of whatever form you receive your bonuses or awards in, celebrate it, enjoy it, and don’t worry too much about it. But if you had a choice in what form an award should be, come reread this article and be sure you made the right choice.
