Restricted stock
Encyclopedia
Restricted stock, also known as letter stock or restricted securities, refers to stock
of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.
One type of restricted stock is a form of compensation granted by a company. Typically, the conditions that allow the shares to be transferred are continued employment during a period of time, upon which they vest
. However, those restrictions can also be some sort of performance condition, such as the company reaching earnings per share
goals or financial targets. Restricted stock is becoming a more prominent form of employee compensation, particularly to executives
. It has come to prominence as stock options have fallen out of favor after the perceived excesses of the stock market in the early 21st century.
Restricted stock awards are also coming into favor for executives because the income tax
consequences can be more favorable to employees than stock options. For example, in the US the consequences of a restricted stock award may be managed by the election under section 83(b) of the Internal Revenue Code
, and in some cases the award can be structured to allow for the deferral
of all tax until the time of the sale of the stock, and for all appreciation to be taxed at capital gains rates, even if the stock appreciated prior to vesting. In contrast, stock options can result in ordinary income to the recipient when exercised, especially when the stock has appreciated prior to vesting, with only the post-exercise appreciation deferred to the time of sale at capital gains rates.
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.
One type of restricted stock is a form of compensation granted by a company. Typically, the conditions that allow the shares to be transferred are continued employment during a period of time, upon which they vest
Vesting
In law, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal...
. However, those restrictions can also be some sort of performance condition, such as the company reaching earnings per share
Earnings per share
Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...
goals or financial targets. Restricted stock is becoming a more prominent form of employee compensation, particularly to executives
Corporate title
Publicly and privately held for-profit corporations confer corporate titles or business titles on company officials as a means of identifying their function in the organization...
. It has come to prominence as stock options have fallen out of favor after the perceived excesses of the stock market in the early 21st century.
Restricted stock awards are also coming into favor for executives because the income tax
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
consequences can be more favorable to employees than stock options. For example, in the US the consequences of a restricted stock award may be managed by the election under section 83(b) of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
, and in some cases the award can be structured to allow for the deferral
Deferral
Deferred, in accrual accounting, is any account where the asset or liability is not realized until a future date , e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability...
of all tax until the time of the sale of the stock, and for all appreciation to be taxed at capital gains rates, even if the stock appreciated prior to vesting. In contrast, stock options can result in ordinary income to the recipient when exercised, especially when the stock has appreciated prior to vesting, with only the post-exercise appreciation deferred to the time of sale at capital gains rates.
See also
- Concentrated stockConcentrated stockConcentrated stock is an equity making up a substantial part of the investor's portfolio. The major risk associated with such a portfolio is a lack of diversification; concentrated stock makes a large portion of the investor's wealth dependent on the performance of one particular stock...
- Market capitalizationMarket capitalizationMarket capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding of a publicly traded company...
- Outstanding shares
- Public floatPublic floatThe float of a company whose stock is publicly traded has different default meanings depending on the presumed context.Without a qualifier it may refer to the entire market capitalization of the company or only its publicly traded equity....