RSU vs. PSU: Which is the Better Fit for Your Company?

Casey Fenton

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November 24, 2023

Which equity compensation option fits your company best: RSUs or PSUs? It's the kind of question that keeps employers awake at night, especially when you're aiming to keep your workforce motivated while also balancing the books.

Naturally, both Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) have their pros and cons, unique features, and impacts on company culture. You’ll have to lay them out side by side before you can decide.

Whether you're a startup founder, HR executive, or a CFO in a large corporation, getting a grip on these financial instruments is key to crafting a package that rings true to your organizational goals. So let’s start gripping, shall we?

Understanding Restricted Stock Units (RSUs)

Imagine the excitement that fills the room when telling employees they'll receive company stock. That's the appeal of Restricted Stock Units, commonly known as RSUs.

Definition and Basic Characteristics

RSUs are promises from employers to employees that they'll receive shares of company stock once certain conditions are met, usually a time-based vesting schedule.

Imagine giving employees a treasure chest but locking it for a certain period. They can see it; they know they’ll eventually get it, but patience is key.

Pros of RSUs for Employers

You're probably familiar with the old saying, "Good help is hard to find." RSUs make it easier to not only find good help but also keep it around. 

When employees know that vested shares await them in the future, the likelihood of them jumping ship diminishes. You've created an emotional and financial tether to the company, which only grows stronger over time. This deep-rooted connection becomes a vital part of your long-term growth strategy, making employee retention a less daunting challenge.

Moreover, with RSUs, you don’t need to delve deep into financial complexities or navigate a labyrinth of legalese. The administrative burden is relatively light, providing a hassle-free experience.

Companies, especially those without a sprawling HR department, find this simplicity attractive. It allows you to focus more on business operations and less on intricate paperwork.

Cons of RSUs for Employers

While RSUs offer many benefits, they do come with their share of drawbacks—most notably, the dreaded tax implications.

When RSUs vest, it's like setting off a small tax bomb for both you and your employees. Everyone will need to adjust their financial calculations to accommodate this new taxable income. It's essential to keep a calculator and financial advisor close at hand, and maybe even brace for some grumbling around the water cooler.

Another disadvantage is the lack of flexibility. RSUs are fantastic for keeping talent within your four walls, but what about inspiring that talent to climb higher and reach further?

Unfortunately, RSUs come up a bit short in this area. They don’t offer much flexibility when it comes to motivating employees to exceed their usual performance metrics.

Real-world Examples

Ever wonder why top talent flocks to tech giants like Microsoft and Google? One big draw is their generous RSU offerings.

These companies have managed to strike the balance between employee retention and performance, making RSUs a cornerstone in their highly competitive compensation packages.

Now that you’ve had a bird’s-eye view of RSUs, why don’t we take a look at Performance Stock Units (PSUs) and what sets them apart?

Deciphering Performance Stock Units (PSUs)

Picture this: Employees are not just working for the weekend; they're working to meet performance goals that could substantially boost their financial wellbeing. That's the magic of Performance Stock Units, or PSUs for short. 

Definition and Basic Characteristics

Much like their cousin, the RSU, PSUs are promises of company stock. The difference lies in the conditions for vesting. With PSUs, it's not just about time; it's also about meeting performance metrics like revenue growth or customer satisfaction scores.

Imagine creating a treasure hunt where the prize isn't just finding the treasure; it's also about how skillfully the journey is navigated.

Pros of PSUs for Employers

When employees know their stock units' worth directly correlates with the company's performance, you can expect an uptick in motivation. 

High-performing teams and climbing business metrics often go hand-in-hand, so it's a win-win. Why? Because a rising tide will lift all the boats in the water.

If your business is hitting it out of the park, the value of the PSUs your employees hold will also rise, reinforcing a culture of shared success.

PSUs are also tax efficient, and who doesn't like to save on taxes? With PSUs, the tax implications can be favorable if you structure them correctly. That's why PSUs are a go-to option for companies looking to align their tax strategy with their compensation packages.

But a word to the wise—consult a tax advisor. Even though PSUs offer potential tax benefits, the devil's in the details. Navigating the tax landscape without expert advice can lead to unnecessary complications.

Cons of PSUs for Employers

On the flip side, there's no getting around the fact that PSUs come with their own set of complexities. The most notable one? Setting the performance metrics.

Unlike RSUs, where a time-based vesting schedule might suffice, PSUs require a lot more planning and deliberation. The goals you set must be ambitious yet attainable; otherwise, they could demotivate your employees. 

The key here is to find that sweet spot where the targets are challenging but not unreachable.

Another disadvantage is the potential for employee discontent. Let's not mince words—setting goals that are too lofty can backfire.

If employees perceive the performance metrics as unattainable, morale could take a hit. It's like asking someone to climb Mount Everest without the right gear; the mere thought can be daunting.

So, as you sketch out your PSU strategy, keep employee morale top of mind. Goals should inspire and energize the team, not serve as a source of stress or discouragement.

Real-world Examples

Tech giants like Amazon have mastered the art of employing PSUs, particularly for executive compensation. They've set challenging yet attainable goals, effectively using PSUs as a tool to align personal incentives with broader company objectives.

Now comes the crux of your crisis: Which one should you get for your company? Let’s first compare the two so you can get a clearer idea.

RSUs vs. PSUs: A Comparative Analysis

The truth is, each has its merits and drawbacks. So sit back and pay attention, because it's time for a face-off between RSUs and PSUs!

Vesting Mechanisms

  • RSUs: The vesting here is usually time-based. That means employees have to stick around for a certain period before those promised shares materialize into something real.

  • PSUs: This gets a bit trickier. Not only is there a time-based component, but there are also performance goals that need to be met. Imagine a race where speed isn't the only thing that matters; strategy counts, too.

Tax Implications for Employers

  • RSUs: While the tax situation is more straightforward, there can be liabilities upon vesting. Make sure to keep a tax advisor on speed dial.

  • PSUs: Things are more complex on the tax front, but this could be advantageous. A well-structured PSU plan may offer tax benefits that RSUs can't match.

Administrative Challenges

Both RSUs and PSUs aren't without their headaches when it comes to paperwork and monitoring.

  • Documentation: RSUs often have simpler forms and fewer conditions to track, while PSUs can require more extensive documentation.

  • Compliance: Both have compliance requirements, but PSUs usually demand a closer eye on performance metrics.

  • Employee Communication: With RSUs, it's easier to explain the benefit. PSUs may require more detailed explanations and perhaps even workshops to ensure everyone is on the same page.

Key Differences

So what really sets RSUs apart from PSUs?

  1. Vesting requirements: Time-based for RSUs, performance-based for PSUs
  2. Tax treatment: More straightforward for RSUs, more complex but potentially beneficial for PSUs
  3. Administrative complexity: Easier for RSUs, more involved for PSUs
  4. Alignment with company goals: PSUs usually offer better alignment
  5. Potential for employee motivation: RSUs for retention, PSUs for performance

Feeling like an expert yet? Good, because up next are some actionable tips on how to choose the best option for your unique business needs.

Best Practices for Employers

Alright, so now you're well-versed in the ins and outs of RSUs and PSUs. But knowing the playbook is one thing; putting it into action is another.

Deciding Between RSUs and PSUs

Don't rush into a decision. Consider the particulars—your company's size, stage of growth, and the type of talent you're looking to attract.

Smaller companies may find RSUs more manageable, while larger, more established companies might appreciate the performance incentives that come with PSUs. It's crucial to assess your specific needs and limitations.

Crafting a Balanced Compensation Package

No rule says you have to stick to one or the other. Think of it as building a dream team for your employee benefits.

Some businesses offer a blend of RSUs and PSUs, adding in other perks like health benefits, bonuses, and even gym memberships. Remember, a well-rounded package can be the key to both attracting and retaining top talent.

Legal Considerations

Legal compliance isn't optional.

Consulting with legal and tax professionals can be a real lifesaver. Even a small oversight today could snowball into a full-blown crisis tomorrow. So, before pulling the trigger on any equity compensation plan, seek professional advice.

Employee Communication

It's not just about what you offer; it's also about how you communicate it. Transparency and education can go a long way.

Consider organizing informational sessions or providing easy-to-understand materials that break down the nitty-gritty of your equity options. Because, let's face it, when employees understand the “what” and “why,” they’re far more likely to be satisfied and motivated.

Final Thoughts

It's one thing to offer a competitive salary, but adding equity compensation to the mix? Now you're playing in the big leagues. The beauty of it all lies in the versatility—RSUs and PSUs allow you to craft a compensation package as unique as your company's fingerprint.

RSUs make for a simple and effective way to reward longevity and commitment, offering a financial cushion that everyone can appreciate. On the flip side, PSUs enable you to link compensation to performance metrics, aligning individual goals with the bigger picture.

Equity compensation, whether in the form of RSUs, PSUs, or a mixture of both, presents a compelling avenue for rewarding hard work and achieving business objectives.

The bottom line? The goal isn't just about filling seats. You're building a team that’s motivated, loyal, and aligned with your company's vision.

Take a moment to assess what you currently offer. Does it draw talent and keep them in their seats, hungry for more? If not, perhaps it's time to revisit your compensation strategies, with a fresh emphasis on equity options.

And if you’d like to know more about equity compensation options like RSU, PSU, and others—drop us a message. Let’s talk!

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ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

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