Stock Options vs RSUs: What’s the Difference?

The main difference between RSUs and stock options is that stock options are only valuable when the cost of acquisition is less than the fair market value while RSUs are inherently valuable once granted, as there is no associated acquisition cost.

  RSUs Stock Options
Purpose Complement income by providing stock compensation tied to achievement or specific events. Incentivize employees by providing an option to acquire company shares at a predetermined price on a specified vesting schedule.
Taxation RSUs are taxed as income and do not attract capital gains as tax authorities view them as deferred employee compensation/bonuses. Stock options can be taxed as income/capital gains based on how they are accounted for and structured.
Cost of Acquisition Restricted stock units or RSUs are deferred employee compensation and are unlocked when certain metrics are reached. As such, they have no associated cost of acquisition. Stock Options can be exercised by employees when vested, enabling the purchase of company shares at a predetermined exercise price. As a result, this incurs a cost.
Size RSUs are issued selectively with lower denominations and are granted with lesser frequency. Stock Options are issued more liberally and with higher denominations compared to RSUs.

What are Restricted Stock Units (RSUs)?

RSUs represent shares that will vest on a predetermined date when certain conditions are met or a specified event occurs.

When the terms of an RSU are fulfilled, the employee becomes a shareholder as an RSU is a right rather than an option, and thereby has no associated cost of acquisition.

RSUs when vested enable employees to obtain cash for those securities creating a tax liability for the employee and such amounts should be included in the T4 amounts reported to the CRA.

Dividends/Voting Rights

RSUs are a promise to pay an employee in company stock with the passage of time and/or specific events taking place.

As a result, RSUs when issued have no value and employees don’t receive any dividends or have any voting rights while holding such RSUs prior to vesting.

RSUs may include dividend rights.

Such benefits are known as dividend equivalent rights.

Tax Implications

The tax treatment of RSUs is straightforward as they become fully taxable as ordinary income tax the moment they vest.

Many employers will holdback vested shares to pay for the associated tax liability.

Vesting Conditions

RSUs are only of value when they vest rather than when they are issued.

When accepting compensation in the form of RSUs, employees need to understand the factors affecting their RSUs, for example:

  • Time or specific events that will vest the RSUs
  • Impact of reorganizations/mergers/acquisitions
  • Implications if one leaves the organization, whether by choice or is terminated
Employees reviewing RSU and stock option compensation

What are Stock Options?

In order to incentivize employees and drive a stronger alignment of interests between the company and its employees, employers offer stock options.

These options allow employees to buy shares of the company at a specified price based on performance and other targets.

On meeting these targets or objectives, employees can have these shares vest and exercise these options.

In high-demand tech and software jobs, these options can be a big part of a compensation package and a useful tool that companies rely upon to retain top talent

Vesting Period

Employee stock options take a specified period to “unlock” upon which the employee can exercise these vested options.

At any point, any desire to switch companies will lead to forfeiting any unvested options and can influence career move decisions.

Tax Treatment

While exercising vested options, employees have to keep in mind the tax implications of such actions and set aside cash for meeting this obligation.

Hedging

Oftentimes, when a publicly listed company has Restricted Stock Units vesting, it

leads to a surge in supply and market participants look to get ahead of this by selling the stock to hedge their shares and minimize market risk from oncoming RSU supply.

In Summary

RSUs might have a small advantage due to the non-existence of any upfront acquisition costs, but at the same time, it is critical to pay close attention to the conditions and events that need to exist or take place for such RSUs to be granted.

Further, stock options are a great tool to support and promote employee retention in a competitive labour market and companies fighting for top talent can accelerate the vesting schedule to differentiate their employment offer from others.

Frequently Asked Questions

  • Are RSUs the same as an ESOP?
  • What is a good RSU offer?

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.