Pros for Offering a Restricted Stock Program

It is common for corporations to give key executives or managers stock options. A restricted stock program is similar, except:

  • Employees actually own the restricted stock.
  • Stock options merely grant the employee a chance to buy stock at a later time.

Companies may want to add equity compensation in the form of a restricted stock program for some or all of the following reasons:

  • Rewards key employees, promoting loyalty.
  • Aids in retention of employees.
  • Causes the employee to be more invested in the success of the business.

In addition, income taxes are fairly straightforward as the employee is taxed on the fair market value of the shares when they vest.

When a company considers implementing a restricted stock program, it may realize there are some disadvantages.

Cons for Offering a Restricted Stock Program

Components of executive compensation or employee benefit plans can be great for the employer, great for the employee, or not-so-great for either. It’s important to weigh pros and cons carefully. With restricted stock programs, employers may be concerned about the following issues:

  • Cash compensation is usually easier to manage and administer than equity-based compensation.
  • It’s possible to give away too much of the company and lose a controlling interest.
  • Potential buyers of the company may not be interested in the stock program.
  • Tax implications to the company and the restricted stockholder can become complicated.
  • Employee stock owners have rights, which may include the right to review the company books.

Your company is too important to merit a shallow review of the consequences of a restricted stock program. It helps to have experienced, knowledgeable advisers at your side.