RSUs for C-level Executives: Special Considerations For Top Management‍

Casey Fenton

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December 7, 2023

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In 2018, Tim Cook, Apple's CEO, received a staggering $121 million as part of his compensation, with the vast majority coming from RSUs. Cook's focus on long-term company growth over immediate, short-term profits was richly rewarded, thanks to a well-structured RSU package that vested based on both tenure and performance metrics. These RSUs didn't just make him wealthy; they aligned his fortunes with those of Apple, pushing him to achieve more for the company than a simple salary ever could.

This real-world example showcases the compelling power of Restricted Stock Units (RSUs) in C-level executive compensation. As a startup founder or company owner, determining how to compensate your top executives is one of your most critical decisions. Getting it right can propel your organization to new heights. 

That's why this article aims to offer you a comprehensive guide to leveraging RSUs for C-level compensation—ensuring that like Cook, your executives are incentivized to steer your company toward long-term success.

How C-level Executives Are Traditionally Compensated

It’s necessary to understand the traditional landscape of C-level executive compensation. These are high-stakes roles, and the compensation packages often reflect that through a combination of multiple elements, designed to attract and retain top talent while also driving performance.

1. Salary

A base salary serves as the guaranteed component of an executive's compensation package. This fixed annual payment provides financial stability but can sometimes be seen as lacking the incentive for long-term commitment or exceptional performance.

2. Bonuses and Incentives

Bonuses and short-term incentives are often tied to performance metrics, albeit usually on a shorter timeline like quarterly or annually. While they can drive immediate results, their downside is that they may also encourage a short-term focus at the expense of long-term planning and investment. For example, an executive might push for higher immediate sales, neglecting research and development, which would secure the company's future.

3. Perks and Benefits

Perks like car allowances, private jets, and club memberships are not just glamourous add-ons; they're designed to make the executive's life more efficient, reducing distractions and enabling better performance. However, they also come under heavy scrutiny from shareholders and the public, often being seen as excessive or wasteful.

4. Stock Options

Stock options give executives the right, but not the obligation, to buy shares of the company at a predetermined price within a specific time frame. They align the executive’s interest with the shareholders, in theory. However, the benefits are only realized when the stock price appreciates beyond the option price, making it a higher-risk component of the package.

5. Pension Plans and Deferred Compensation

For long-term stability, many packages include pension plans or other forms of deferred compensation. These are designed to reward executives for staying with the company for an extended period and may also be tied to performance metrics.

6. Golden Parachutes

These are clauses that provide substantial benefits to executives if the company undergoes a change in control, such as a merger or acquisition, and they are ousted as a result. While useful for attracting high-level talent wary of corporate instability, they can be expensive and controversial.

As you can see, traditional forms of executive compensation are multifaceted but come with their own sets of challenges and limitations. They can either tie executives too loosely to the company's fortunes or tether them so tightly that they become risk-averse. That's where the agility and balance of RSUs come into play, offering an appealing alternative for compensating your C-level executives.

Introducing RSUs for C-level Executives

As you seek to refine your compensation packages, Restricted Stock Units (RSUs) emerge as a compelling tool. They provide an excellent balance between incentivizing performance and ensuring retention. Unlike stock options, which offer the right to buy shares at a predetermined price, RSUs grant actual shares or their cash equivalent after a specified vesting period. This simplicity and direct link to ownership make them attractive.

RSUs are company shares that are promised to an executive but are restricted from immediate transfer until certain conditions are met. These conditions could range from time-based vesting to performance-based criteria. The key point is that RSUs have a 'time-lock,' aligning executive compensation with the long-term health of the company.

Advantages of RSUs

  • Simpler Tax Treatment: When it comes to taxation, RSUs are generally less complicated than stock options. They are taxed as ordinary income based on their fair market value when they vest, minus any amount the executive paid for them. This straightforward tax treatment can often be easier to manage and predict than the tax intricacies associated with stock options.

  • Long-Term Alignment: One of the most significant advantages of RSUs is the alignment of interests between the executive and the company. Because RSUs vest over time or based on performance metrics, they keep executives focused on the company's long-term goals. This makes it less likely for the executive to make high-risk decisions for short-term gains that could adversely affect the company in the long run.

  • Retention and Attraction: RSUs act as a 'golden handcuff,' binding executives to the company. Given that RSUs vest over time, they create a strong incentive for top talent to stick around, minimizing the risk of losing them to competitors.

  • Mitigating Downsides: While RSUs offer a lot of benefits, they are not without their drawbacks. For instance, unlike stock options, RSUs do not offer the potential for leveraged gains because executives receive the shares outright. However, many view this as a balanced trade-off for their lower risk and simpler tax treatment.

How RSUs Compare to Stock Options

To put it simply, RSUs are less volatile than stock options but offer less upside potential. With stock options, the executive stands to gain only if the stock price rises above the strike price. RSUs, however, have intrinsic value from the start. Even if the stock price falls, they still hold some value, offering a sort of financial cushion.

How to Assign RSU Allocations for Different C-Suite Positions

When it comes to C-level executives, one size certainly does not fit all. The unique responsibilities and challenges of each role make it essential to tailor RSU allocations to fit the individual positions within your executive team. Here's how to approach this complex task:

1. CEO, The Strategic Leader

The CEO, being the most high-profile executive and the face of the company, has responsibilities that affect every aspect of the organization. They are responsible for strategic planning, stakeholder relationships, and overall leadership. Therefore, their compensation package often includes the most substantial RSU allocation. This high allocation isn't just for show—it's to ensure that their financial interests are deeply interwoven with the long-term success and valuation of the company.

2. COO, The Operational Mastermind

The Chief Operating Officer (COO) is often the second in command and oversees the day-to-day administrative and operational functions of the company. A moderate to high allocation of RSUs can be apt for this role. The idea is to make sure they are motivated to optimize processes, maintain operational efficiency, and foster a productive work environment.

4. CFO, The Financial Architect

The Chief Financial Officer (CFO) has a crucial role in financial planning, risk management, and reporting to shareholders. Given their influence on the financial health and integrity of the company, a significant RSU allocation can be an effective incentive. This aligns their interests with those of the shareholders, encouraging prudent financial management and long-term stability.

5. CMO, The Growth Driver

The Chief Marketing Officer (CMO) is responsible for brand building, market positioning, and customer engagement. While crucial for revenue growth, the role might not have as much influence over the entire organizational structure as the CEO or COO. As such, RSU allocations might be moderate but could include performance-based vesting tied to marketing milestones or revenue targets.

6. CTO/CIO, The Technological Vanguard

The Chief Technology Officer (CTO) or Chief Information Officer (CIO) oversees the technological direction of the company. Given the increasing importance of technology in business success, RSU allocations should be competitive enough to attract top tech talent. These could be tied to product development milestones or the successful implementation of tech solutions that give the company a competitive edge.

General Principles for Allocation

  • Equity Over Equality: The aim is not to distribute RSUs equally but equitably, based on the responsibilities and impact of each role.

  • Performance Metrics: Whenever possible, tie some portion of the RSU vesting schedule to individual and company performance metrics. This ensures that each executive has skin in the game.

  • Market Benchmarks: Regularly consult industry benchmarks and competitor practices to ensure your RSU allocations remain competitive. Falling behind the market can make your executives vulnerable to poaching.

By taking a thoughtful, tailored approach to RSU allocations, you can ensure that your compensation packages are not only fair but also strategically designed to drive your company toward its long-term goals.

Designing the Right Vesting Schedules for Top Management

The vesting schedule is where the rubber meets the road in the world of RSUs. While allocating the right number of RSUs to each C-level executive is vital, how and when those RSUs vest can be equally—if not more—impactful. A well-designed vesting schedule aligns the incentives of your executives with the long-term success and stability of your company. Let’s delve into the key considerations:

1. Time-Based Vesting

The simplest form of vesting is time-based, where RSUs convert to actual shares after a predetermined period. For C-level executives, a common structure is a 4-year vesting schedule with a 1-year cliff. This means that no shares vest for the first year, but a substantial portion (often 25%) vests all at once at the one-year mark. This serves to both retain talent and reward loyalty.

2. Performance-Based Vesting

Performance-based vesting ties the vesting of RSUs to specific corporate milestones. This could range from revenue targets to market share or even non-financial metrics like customer satisfaction scores. For roles like the CMO or Sales Chief, this can be particularly effective. It provides a powerful financial incentive to hit and exceed targets.

3. Hybrid Vesting

Increasingly, companies are adopting a hybrid model that combines elements of both time-based and performance-based vesting. For example, half of an executive’s RSUs might vest over time, while the other half only vests when certain key performance indicators or KPIs are met. This ensures that executives are not only committed to the long term but are also motivated to hit essential milestones.

4. Accelerated Vesting

Accelerated vesting provisions can also be useful. These clauses can fast-track the vesting schedule in specific scenarios like acquisitions, mergers, or other major corporate events. While this can be an attractive feature for top talent, use it sparingly and thoughtfully to avoid unintended consequences.

Tailoring Vesting Schedules to Roles

Remember, the "one-size-fits-all" approach doesn’t work well for vesting schedules. The CEO might have a vesting schedule tied closely to long-term company performance metrics, while the CTO might have vesting milestones related to product launches or technological advancements. The key is to align the vesting schedule with the responsibilities and impact areas of each role.

Before implementing any vesting schedules, consult with legal and financial advisors to ensure compliance with existing laws and regulations. Failure to do so could result in penalties or even invalidate your RSU agreements.

Lastly, make it a point to regularly review and, if necessary, adjust the vesting schedules. As your company grows and evolves, your compensation strategies should evolve too.

Ethical Considerations for Executive RSU Compensation

While RSUs offer a range of advantages for compensating top management, they are not without ethical implications. The nature and scale of executive compensation are under increasing scrutiny, not just from shareholders but also from employees, regulators, and the general public. Here's what you need to consider:

1. Transparency and Fairness

Transparency is critical when it comes to executive compensation. All stakeholders, from the board of directors to shareholders and employees, should clearly understand how RSUs are being allocated and vested. This can help avoid accusations of favoritism, inequality, or 'golden parachute' arrangements that provide undue benefits to exiting executives.

2. Pay Equity

The pay gap between executives and average employees has become a significant social issue. While RSUs are often aimed at incentivizing top-level executives, it’s essential to consider how these allocations might exacerbate pay disparities within the company. Regularly revisiting and justifying the pay ratios between different levels of the organization can help maintain ethical standards.

3. Alignment with Corporate Social Responsibility (CSR)

Another consideration is whether RSU vesting metrics align with your company's CSR goals. Are executives rewarded for sustainable practices, diversity initiatives, or community engagement? Adding such performance metrics to RSU vesting schedules can provide a more holistic view of corporate success.

4. Incentives and Unintended Consequences

It's crucial to align the vesting conditions of RSUs with ethical and responsible business practices. Poorly designed performance metrics can inadvertently incentivize executives to take excessive risks or focus on short-term profits at the expense of long-term stability and ethical considerations.

5. Regulatory Compliance

Always stay on top of relevant laws and governance codes related to executive compensation. Falling foul of regulations can lead to not just financial penalties but also reputational damage.

6. Employee Relations

Consider how the RSU-based compensation of executives is perceived by other employees. A perception of inequity can significantly affect employee morale and productivity. Communication is key here; explaining the rationale behind RSU allocations can go a long way in maintaining a positive work environment.

7. Board Oversight

A board committee focused on executive compensation can serve as an ethical watchdog. By involving independent directors in compensation decisions, you can add an extra layer of scrutiny and objectivity.

By carefully navigating these ethical considerations, you can develop an RSU compensation structure that benefits not only your executives but also your broader stakeholder ecosystem, balancing both performance and principle.

RSU Tips to Prevent Your Top Management Talent From Being Pirated

In the competitive corporate landscape, talent poaching is a reality you can't afford to ignore. Offering an attractive compensation package is vital, but so is designing it in a way that discourages your executives from jumping ship. RSUs can be a powerful tool in your arsenal for this purpose. Here's how:

  • Back-Loaded Vesting Schedules: Traditional vesting schedules often involve an equal number of shares vesting each year. However, a back-loaded schedule, where a larger number of shares vest in the later years, can be a strong incentive for executives to stay for the long term.

  • Rolling Vesting Schedules: Another option is to implement rolling vesting schedules, where a new tranche of RSUs starts its vesting cycle each year. This approach ensures that there is always a substantial number of unvested RSUs, acting as a continual 'golden handcuff.'

  • Special Bonuses in RSUs: Consider offering special RSU bonuses tied to crucial milestones like successful acquisitions, market expansion, or significant innovations. These 'bonus' RSUs could have their own accelerated vesting schedule, providing a timely reward for exceptional performance while simultaneously discouraging executives from leaving.

  • Matching Contributions: One innovative approach is to offer a matching RSU grant for executives who purchase company stock with their own money. This not only aligns their interests closely with the company’s but also makes the thought of departing less appealing, given the substantial stake they would have in the business.

  • Contractual Agreements: While RSUs can serve as financial deterrents to leaving, don't underestimate the importance of robust contractual agreements. These could include non-compete clauses and extended post-termination vesting periods, adding additional layers of protection.

  • Clawback Provisions: Implement clawback provisions that allow the company to reclaim vested or unvested RSUs under certain circumstances like misconduct or breach of contract. This not only acts as a deterrent but also adds an ethical dimension to your compensation structure.

  • Keep the Conversation Open: Open dialogue is essential. Regularly review the RSU packages with your executives to ensure they feel adequately compensated for their performance and commitment. Discontent can often be nipped in the bud through transparent and timely discussions.

  • Stay Competitive: Always keep an eye on industry benchmarks and competitor compensation packages. Being unaware of market trends can leave you vulnerable to losing your top talent to more attractive offers.

Bottomline

Compensating C-level executives isn't just a matter of negotiating a salary and signing on the dotted line. In today's complex business landscape, RSUs have emerged as a compelling tool to attract, motivate, and retain your company's leadership. But as we've explored, the process is far from straightforward.

From understanding traditional compensation models to intricately designing RSU allocations and vesting schedules, there's a lot you need to get right. Balance is crucial—between short-term gains and long-term vision, between incentivizing top-level executives and maintaining pay equity, and between performance metrics and ethical considerations.

If designed thoughtfully, RSUs can not only ensure that your top talent stays put but also that they perform to their highest potential, fully aligned with your company's goals. So, as you navigate the complexities of C-level executive compensation, keep these insights and strategies in mind. Because, at the end of the day, your leadership team isn't just a line item in a budget—they are the architects of your company's future.

Alternatively, you may reach out to Upstock and discuss how you can incorporate key elements of executive pay into your RSU compensation plans to ensure fairness, transparency, and flexibility. Book a demo today and see the difference.

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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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