Big Companies Are Laying Off. How Does It Impact Employee RSUs?‍

Big Companies Are Laying Off. How Does It Impact Employee RSUs?‍

August 30, 2023

Big Companies Are Laying Off. How Does It Impact Employee RSUs?‍

The first quarter of 2023 has witnessed a surge in layoffs across a diverse range of industries in the U.S., from tech startups to traditional manufacturers and service providers. Companies like Amazon and Microsoft, as well as media giants like ESPN and Vice Media, were not immune to the sweeping wave of significant workforce reduction. Just this week, The Washington Post joined the growing list, offering its 240 a voluntary separation program.

Despite a slight drop in the unemployment rate, the sheer volume of job cuts—totaling 136,000 in just three months—has raised concerns about the stability of the labor market and the looming threat of a recession. Companies are citing various reasons for these layoffs, including restructuring plans, cost-cutting measures, and shifts in market dynamics, all against a backdrop of economic uncertainty. The question now is, how do they affect job security and compensation structures?

How Recessions and Company Restructuring Impact Laborforces and Compensation

In times of economic downturns or internal restructuring, companies often resort to layoffs as a quick way to cut costs. While this might offer immediate financial relief to the organization, it leaves employees scrambling to find new opportunities, often in a job market that is less than favorable.

Recessions tend to hit industries unevenly. For example, the tech sector might see a surge in demand for cloud services but a decline in consumer electronics sales. Similarly, the healthcare industry might experience an uptick in telehealth services but a decrease in elective surgeries. This uneven impact often leads to targeted layoffs, where specific departments or roles within a company are eliminated.

Company restructuring, on the other hand, is usually driven by a need to pivot the business model or focus on more profitable ventures. This could mean that even profitable departments get downsized or eliminated to free up resources for what the company sees as its future.

Both scenarios have a direct impact on employee compensation. Salaries might be frozen, bonuses cut, and in some cases, vested Restricted Stock Units (RSUs) could become a financial lifeline. However, the fate of unvested RSUs can be less certain, often depending on company policy or the terms of a severance package.

What Happens to Your RSUs When You're Laid Off

In the unsettling event of a layoff, your job isn't the only thing at stake—your financial future can hang in the balance, too. One key player in this scenario is your RSUs. Here's what you need to know about the fate of your RSUs if you find yourself facing a pink slip.

Vested RSUs

If your RSUs have already vested, they are yours to keep. You can either sell them immediately or hold onto them in hopes that the stock price will increase. However, it's crucial to consider the tax implications. Vested RSUs are considered taxable income, and depending on your jurisdiction, you may owe a significant amount in taxes.

Unvested RSUs

Unvested RSUs are a different story. Typically, you lose these if you're laid off unless your employment contract or severance package states otherwise. Some companies offer accelerated vesting as part of a severance package, allowing you to keep some or all of your unvested RSUs.

Accelerated Vesting

Accelerated vesting can be a silver lining in the unfortunate event of a layoff. This provision allows a percentage of your unvested RSUs to vest immediately upon your termination. The specifics can vary widely and are usually outlined in your employment contract or the severance package.

FUTA Taxes and Severance Packages

If you're laid off, you might be eligible for unemployment benefits, which are subject to Federal Unemployment Tax Act (FUTA) taxes. Your severance package, including any accelerated vesting of RSUs, could affect your eligibility for these benefits. It's essential to consult with a tax advisor to understand how your RSUs and severance package interacts with unemployment benefits.

Avoiding Emotional Decisions

Losing a job is emotionally taxing, and it's easy to make rash decisions about your vested RSUs. Whether it's selling them off in a panic or holding onto them out of a sense of loyalty to your former employer, emotional decision-making can cost you. Consult with a financial advisor to make well-informed choices.

Understanding what happens to your RSUs when you're laid off is crucial for financial planning. It can make the difference between having a financial cushion to fall back on and facing financial hardship. Always read the fine print of your employment contract and severance package, and consult with financial and tax advisors to navigate this complex issue effectively.

How RSUs Might Indirectly Secure Your Employment

In the volatile landscape of recessions and corporate overhauls, job security is a rare commodity. However, holding RSUs can subtly tilt the scales in your favor. Here's how:

  1. Talent Retention Strategy: Companies often use RSUs as a tool to retain top talent. If you're sitting on a significant number of unvested RSUs, letting you go could be a costly decision for the company. This makes you a less likely target for layoffs, especially if the RSUs are set to vest soon.

  1. Employee Value Proposition: RSUs are often awarded based on performance and potential. If you've received RSUs, it's a signal that the company values you. In times of restructuring, businesses are more likely to retain employees they've already invested in.

  1. Negotiation Leverage: If layoffs are imminent, your unvested RSUs can serve as a bargaining chip. You could negotiate for an accelerated vesting schedule as part of your severance package, which not only benefits you but also shows the company's willingness to honor its commitments.

  1. Financial Cushion: Even if you do face a layoff, vested RSUs can provide a financial cushion that allows you to be more selective in your next career move. This can be particularly beneficial during a recession when job opportunities are scarce.

  1. Alignment with Company Goals: RSUs align your financial interests with the company's long-term success. This can make you more committed and focused, qualities that are highly valued during challenging economic times.

Why RSUs Are More Resilient Than Stock Options During a Recession

But good news for those with RSUs: when the economic climate turns sour, RSUs often prove to be a more resilient asset than stock options, so might not need to worry much. Here's why:

  1. No Strike Price: Stock options come with a strike price, which is the price you'll pay to buy the stock. If the company's stock falls below this price, the options become "underwater" and lose all value. RSUs, on the other hand, have no strike price and retain some value as long as the company's stock has value.

  1. Lower Volatility Risk: RSUs are less volatile than stock options because they are not leveraged. This means that while they may not offer the same upside potential during boom periods, they also don't carry the extreme downside risk that stock options do in a recession or market volatility.

  1. Tax Implications: RSUs are generally subject to ordinary income tax upon vesting, regardless of whether you sell them. Stock options, however, can lead to complicated tax scenarios, especially if they go underwater. This makes RSUs simpler and potentially less costly from a tax perspective.

  1. Predictable Value: RSUs provide a more predictable value than stock options, which can be particularly beneficial during economic downturns. You know that you will receive the stock at the vesting date, providing a level of certainty in uncertain times.

  1. No Upfront Cost: Unlike stock options, which require you to pay a strike price to realize any gains, RSUs come at no upfront cost. This can be a significant advantage during a recession when liquidity might be a concern.

  1. Alignment with Company Health: Both RSUs and stock options align your interests with the company. However, RSUs often come with fewer conditions and are less likely to be manipulated, making them a more straightforward indicator of company health.

Navigating the Uncertain Waters of Recessions and Layoffs

As the wave of mass layoffs continues to sweep across industries—from tech giants like Amazon and Google to media stalwarts like The Washington Post—it's crucial to understand the multifaceted impact of economic downturns and company restructuring on labor forces and compensation. While recessions can lead to job losses and wage stagnation, they also prompt companies to reevaluate their compensation structures, often leaning towards more resilient forms of equity-like RSUs.

RSUs not only offer a cushion during layoffs but also provide a level of stability that is often missing in other types of equity compensation, such as stock options. Their resilience in the face of economic downturns makes them a valuable asset for employees looking to secure their financial future.

In a world where the only constant is change, understanding the details of your compensation package, particularly RSUs, can be your lifeline. As companies continue to adapt to economic pressures, so too should employees arm themselves with the knowledge to navigate these challenging times successfully.

Want more info on RSUs and how you can maximize their value? Head over to Upstock’s learning materials page or check out our blogs here.

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