Quite a few organisations in India, especially technology-oriented companies, recognise the efforts of employees by offering them either restricted shares or stock options to retain them. If given a choice to choose between restricted share units (RSUs) or stock options, it can be confusing as to which is more beneficial.
Stock options give a right to employees to buy the shares of a company at a discounted price and sell in the stock market at the market rate. This is an option and not an obligation for an employee. Conversely, RSUs are a subcategory under “stock options”, with certain restrictions. RSUs are linked to the vesting period of the employee, which is not the case with stock options.
Restricted Stock Units vs stock options
Both the options are employee compensation techniques. However, there are some key differences between RSUs and stock options.
| Parameters | Restricted Stock Units | Stock Options |
| Vesting Period | The vesting period is compulsory in the case of RSU. If 2,000 RSUs are given over 4 years, then 500 RSUs are received by the employee after completion of each year. Thus, all 2,000 RSUs are not given at once. The employee needs to stay with the company to avail RSUs | Stock options are given outright. If an employee is eligible for 2,000 stock options, they will get all those options at once. They need not wait for the completion of the vesting period |
| Contribution from employee | Employees need not pay any price for RSU | An employee needs to pay the exercise price per option to avail stock options |
| Settlement | A company may settle RSU either in cash or through stocks. This means an employee may or may not receive the shares of the company after the vesting period is over | A company has to settle stock options through stocks only. This means if an employee has 2,000 stock options, they will pay the exercise price against which they will receive the shares of the company |
| Dividend rights | Holders of RSUs are not eligible for dividend as actual shares are not allocated | Holders of stock options are eligible for dividend |
| Shareholders’ rights | RSUs are not common stocks of a company. They have restricted rights, and there are no voting rights available before stock conversion | Stock options once exercised are treated as common stock of a company and thus, they have full rights and voting rights in the general meeting of a company |
| Opportunity to gain | RSUs can be sold only after the vesting period is over. Thus, in case the share price is trading at an all-time high, the holder of RSUs cannot sell the shares in the market | Stock options are available for sale in the stock market immediately once the exercise price is paid. Thus, an employee can sell the stocks in case the market price of the shares is trading high |
Deciding between RSUs and stock options
RSUs and employee stock options are both offered to retain the talent within a company. However, the implications of each of them are different and hence, having a clear understanding of both is essential before choosing one.
