Unvested RSUs As Golden Handcuffs: What To Do?

As I mentioned in last Friday’s post, I had interviews for a new job. The interviews went very well. They liked me; I liked the company and the job. After the interviews, the hiring manager gave a verbal go-ahead. Now I’m handed off to HR to talk about the compensation package.

This turned out to be a good exercise to take an inventory of my current compensation. My unvested RSUs became a point of discussion. I come to realize how strongly these to-be-vested RSUs act as golden handcuffs.

RSUs are Restricted Stock Units. They are basically a deferred bonus calculated and paid in shares of the employer’s stock. Unlike a cash bonus, you don’t get it right away. They become yours ("vest", "lapse" or "released") over a number of years. Mine vest 25% each year over 4 years.

When you first get the RSUs, it’s not that big a deal. After you divide the value by 4, it comes out to just a few percentage of your salary.

It gets a little better by the end of the second year. Even if you sell the shares as soon as the RSUs vest, which you should, because there is no tax advantage to hold them, you still get 1/4 of the RSUs granted at the beginning of the first year, plus 1/4 of the RSUs granted at the beginning of the second year. That’s double the value from the previous year.

Things get really interesting by the end of the 4th year. You are collecting 1/4 from each lot granted in the previous years, for the full value of the annual grant. This continues as each year goes by, as shown in the chart below:

I looked at my pay history. My current employer granted on average about 20% of my salary in RSUs each year. I already worked here for more than 4 years. Each year I get about 20% of my salary from the RSUs becoming vested. I’m only paid this money now for the work I already did in the previous years.

It’s very hard to walk away from this. If I leave now, even if the new employer also grants the same amount in RSUs, which it doesn’t, I will have to restart the cycle, collecting 1/4 in the first year, 1/2 in the second year, 3/4 in the third year, versus the full amount every year. Basically I will lose 1-1/2 times the value of the annual grant over a 3-year period. To me, that’s a 10% pay cut for 3 years.

I like the new job, but I’m not that desperate for a pay cut. I may end up turning down this new job.

Do you get RSUs at your job? What percentage of your base salary is the annual grant worth? Have you been in a situation like this? What do prospective employers do to unlock the golden handcuffs?

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Comments

  1. Leigh says

    The offer I signed when I started my current job went somewhat like this: (each X represents a different number)
    1) Base pay of $XX,000
    2) Cash signing bonus to be paid with your first paycheck of $XX,000
    3) Cash signing bonus to be paid with your second anniversary paycheck of $XX,000
    4) RSUs in the amount of $XX,000 vesting over 4 years, starting with your first year anniversary, but with smaller increments than yours at first and then two groupings per year in the last couple of years

    So if you look at your comp schedule over four years:
    1) Base pay + First cash signing bonus + zero RSUs
    2) Base pay (perhaps with raise?) + Second cash signing bonus + first sum of RSUs
    3) Base pay + next sum of RSUs
    4) Base pay + two sums of RSUs
    5) Base pay + two sums of RSUs

    If you take the granting amount of my signing RSUs, you get the second year’s overall bonus being slightly less than the first year’s bonus, especially when you add in the relocation cash bonus I got in the first year.

    I have a spreadsheet that shows the total comp I expect to see in a calendar year, using the 52-week low of my employer’s stock price. One of my ways to evaluate an offer would be: Does the compensation I would receive from my current employer including RSUs for the portion of this year I am proposing to not work there lower than the proposed compensation from the proposed employer for the same portion of the year? I would probably say something along the lines of “I am interested in joining your company, but unfortunately this offer would require me to take a (significant) pay cut, which I’m not interested in doing at this time.” and see if they can do anything about improving the offer.

    One way that they could try to improve the offer is to give you some cash bonuses in the first couple of years to offset not having very many RSU shares vesting.

    Last year, my annual bonus was under 20% of both my new base pay and my pre-review base pay. I have no idea what to expect this year, but 20% sounds like a fair number?

    I’m also starting to look at other employers, but what might end up holding me back is that my 401(k) matching hasn’t vested yet… Do you have any ideas for that one?

    Good luck!

  2. Harry Sit says

    Thank you Leigh for sharing your experience and suggestion. It sounds like you only get an initial grant but not additional grants annually. I was talking about the annual grants. Say I get 1,000 RSUs at the beginning of the 3rd year, to vest over the next 4 years, and the price was $10 per share. I value that grant at $10,000. If my salary was $50k at that time, then it’s 20%. I also get a separate cash bonus, which comes to about 15% of my base. Just curious if my current employer is over-generous in its annual grants. The prospective employer only targets 10% of base in its annual grants.

    Both companies vest 401k matches immediately. The matching rates are comparable.

  3. xyz says

    My employer operated the way yours does — annual refresh grant that vests in equal installments over 4 years. In my case the grant was around 20% of my base salary, or around 15% of my base + typical bonus.

    When I left to join another company, I had somewhere around 50% of my salary in RSUs that I was going to leave on the table. The new employer matched that (though again vesting over 4 years), which helped make the decision to change employers. I later left the new employer and returned to the old. Unfortunately, when rejoining the old employer, they did not re-match the grant, so the move cost me overall a big chunk of $$ in RSUs.

    However, in my case that was compensated for in other ways. Among others, I negotiated a higher cash signing bonus to help make up for it.

    But yes, the ‘golden handcuff’ effect is very real. For my wife, who is more highly compensated than I, changing employers would mean leaving a mid-6-figure option/RSU package on the table. It is challenging for a new employer to match that, and that has certainly factored into her employment decisions.

  4. Leigh says

    I do get additional grants each year, but I haven’t been here long enough to figure out how that actually works in entirety. I think my employer awards them not based on a specific vesting period, but a different vesting period for each person.

    What about health insurance? Will your costs go up with the new employer?

  5. Harry Sit says

    @xyz – Thank you for sharing your experience as well. I think a signon bonus is the way to go. The prospective employer is open to that but it won’t completely compensate for the unvested RSUs. So far it’s only willing to pay 50% of the value due to vest in the next 12 months. Nothing for the RSUs vesting beyond 12 months. Maybe I should also ask for a delayed bonus at the one year mark.

    @Leigh – I haven’t asked them about health insurance yet. Both employers are large publicly traded companies in S&P 100. I’m not too worried about that yet when we still have a much larger gap to fill.

  6. I Am 1 Percent says

    I’m in the same boat. I get about 30% of my base in RSU from my company. My differ in how they vest. Mine fully vest after 3 years. I’ve been with my company for 7 years to every year I get a 30% bonus in RSU’s on top of my annual cash bonus of about another 30%.

    The RSUs have kept me at the company because other companies don’t even offer a sign-on close to 1 year’s worth of RSUs….tough one.

  7. xyz says

    IME, companies are generally willing to be flexible on signing bonuses (since they are one-time payouts). For example, I moved from company A -> B -> A. From B -> A, A had a relatively low cap on the signing bonus, until I discussed it in terms of compensation for lost stock options. At that point they were more receptive.

    In other words, they weren’t willing to give me a large signing bonus just for asking, but if I had a good justification for asking, and made that case with a well reasoned argument, they were willing to be somewhat more flexible.

    Now, obviously this will vary from industry to industry and from company to company. In my case A and B are both mega-cap companies, and my field is computer engineering. I’ve heard that computer programming can have far more lucrative signing incentives.

  8. Nish The Dish says

    The question to be answered is “Why are you looking for a new job?”

    We always have to overcome the inertial effect that is the built up equity of your current job. I am sure your hard earned reputation at your current job is worth more than the annual cumulative effect of your RSU’s (10% of pay). So if you are willing to leave that intangible equity on the table in search of a better tomorrow, then why should the 10% pay cut be the deciding factor?

    Having said that, you can ask for a sign-on bonus to cover the 3 years of lost 1/4′ly RSU payments.

  9. Harry Sit says

    @Nish The Dish – Good question. Why look for a new job? To me, it’s stagnation and feeling under-appreciated. I believe I built up a good reputation but I don’t see how the reputation is being rewarded, but rather taken for granted, except by the lockup effect of the RSUs. I don’t want to just bide my time punching the clock, but I’m not motivated by a pay cut at all. If I’m paid well to punch the clock, I will punch it while I look for the next opportunity.

  10. Andy says

    TFB – if your prospective employer is only willing to compensate you for 50% of the RSU’s that will vest this year, you are leaving an awful lot on the table at your old employer. If you get 20% of salary in RSU’s and they vest over 4 years, it seems you will have a constant balance of 80% of salary tied up in these golden handcuffs.

    I work for a Large Fortune 25 company, and the RSU percentage is determined by your level of management. A mid level supervisor may get 20% of salary in RSU’s. I am just into upper management and my target is 37.5%. Mine vest over 3 years, starting in year 3. I am basically always sitting on 4 full grants, amounting to 1.5x my salary. I had a buddy get forced out a few years ago and it was very painful for him to leave. He was forced to leave the RSUs on the table, and the company where he found a new job didn’t give him much of a signing bonus….nowhere near what he left behind.

    Obviously, you may feel the opportunities at the new company are worth the risk. Just don’t underestimate the cost of leaving. Those golden handcuffs sure are designed well

    Andy :-)

  11. ABC says

    TFB – I laughed out loud at your post 11. Priceless. RSUs vary from industry to industry, and company to company. (I know, obvious.) I worked at a company that was so clueless, they gave the Corp guy who handled expense reports 20k RSUs (not in dollars – actual RSUs) while giving one of my field groups, comprised of 17 people, 15k to split between the entire team. Not surprisingly, much turnover ensued, including me.

    I’m at a company now that is far more generous, though they award them to a smaller % of the employee base. I have seen no correlation to base pay or salary in general (given the wide range in comps, that’s understandable).

    One question I have learned to ask is ‘where does this offer sit in the range?’. I point out that I’ll find out once I’m onboard and that lessens the recruiter’s likeliness to exaggerate. You don’t want to be impressed with what you think is a high offer just because it’s higher than your current comp package…only to find out the new company pays significantly higher and the recruiter low-balled you. I refused to come aboard my current employer without a confirmation that I was above the median even though the initial offer was a 12% raise over what I was making at my then-current employer. Oh, and forget about stock options, obviously. Nice to have, don’t throw them away, but don’t count on them anymore.

  12. Wai Yip Tung says

    You already do all the math. The only thing I’d add is I’ll constraint the comparison to next 2 or maybe 3 years. Looking too far into the future introduce too many variables and there is always a chance for you to switch company in the next few years anyway. (it is like comparing ARM v.s. 30 years fix rate mortgage). By all mean take your RSU number and use it to negotiate with company B.

    At then end of the day, you compare the final offer to your current offer. You may find that A > B. So your rational optimization function tells you to pick company A. Period.

    I was in this situation and I picked company B. In my case, company A is big, stable, boring, staid but is also cash-cow. Company B a small startup, dynamic, position in a great innovative space. However it is cash flow negative in the foreseeable future. Company B match company A’s base salary. But some simple accounting tells me the total pay, including RSU, expected bonus, 401k match, etc. is likely to be 30-40% more for A. Like most tech startup, company B promises pre-IPO stock options. To some people, this may look like a chance to be a millionaire. But I’m too sober and I have some idea what the expected value would be and it most likely will not nearly compensate the 30-40% cut.

    At some point, I tell myself to turn off rational thinking. The base is enough for me to make a living. And I would have betrayed myself if I stay in company A year after year because of the golden handcuff. Among the many good thing to work for company B, one of them is the commute. With company A, it is a frustrating hour long commute that bound me to a rigid train schedule. With company B, it is a 15 minute bike ride. It is flexible and I can pickup things I need along the way. In the morning I would ride along the waterfront, looking at the open view and the blue sky and I often tell myself, “What a lovely day it is!” How much value will you place on feeling like you have a lovely day? I think it easily value 20k or even more. Most people put $0 value on their commute. I think this is the most undervalued benefit in most people’s calculation.

    To sum it up, sometimes I decide to turn off rational calculation and just go with my heart.

  13. Jim says

    Levels of RSU’s vary at our company. In my position, I receive annual grants that currently equal 57% of my base. The vest in three years. Further, I receive a similar amount of performance shares that also vest in three years and they have paid out at about 50% on average. There is also the ability to get additional amounts of each based on personal performance levels. On top of this, there is an additional 10% of salary placed into the cash balance pension plan at the end of each year (on top of the base of 5%.). If you add it all up, a competitive offer is almost out of reach.

  14. B says

    The way things work at my company is that annual bonuses are cash for the first $20k, then 90% RSU,10% cash for the rest of the bonus. The RSUs vest in three years, 0%, 50%, 50%.

    What is probably more relevant to this discussion is the job change my husband went through three years ago. He left a stable company that he had 15 years with (X) to join another stable well known company (Y) in the same highly competitve industry. Company X had been cutting back on compensation and he had not gotten any option grants in the last 3 years (he never got any RSUs there). So, he was fully vested and didn’t have to leave anything on the table. One of his concerns was that if he got laid off at X he would have a substantial severance (1 year or so) to adjust and find a job. If he got laid off at Company Y he would have no tenure and a minimal severance. Company Y provided RSUs amounting to about $30K that vested over 3 years (33% each year). They also provided about 5600 options at the current stock price, vesting the same way. This severance concern seemed to work as leverage in the negotiations. He also got about a $50K bump in pay, so it has worked out well.

    Have you thought about trying to get your current company to counter their offer? Or provide a specific assignment with career development that you are looking for?

  15. Snoho3 says

    Interesting discussion – I have a portion of my comp. awarded in RSUs. Percent and schedule not really relevant. But here’s my question – What happens to your RSU’s when you formally retire? My current plan is that the remaining RSUs are forfeited. I wonder if that is the industry norm? It’s under discussion at my firm, so things may change – I hope. Is anyone else faced with this connstraint/penalty? Thanks!

  16. xyz says

    At the two employers where I’ve worked, you generally lose your RSUs if you retire before age 60. However, if your retirement is qualified, which generally means that you have ‘x’ years at the company, you get accelerated vesting of options and RSUs, so you don’t lose them (but you do have to cash them in within ‘y’ days of official retirement)

    Also, there are times when early retirement packages are offered to certain employees. In those cases, equity award vesting is sometimes (but not always) also accelerated.

  17. Vijay says

    I haven’t read through all the comments, but you should be asking the new employer to compensate what you lose through a sign on bonus in cash + RSU. The big big (usually unpredictable) is company performance. If old company stock is a dog and new company stock has double digit potential growth, it makes the math a lot harder and your case a lot weaker.

  18. Brian says

    My employer has an interesting twist on the golden handcuffs. We have RSUs which vest 0%/0%/100% over 3 years. And we have stock options which vest 40%/30%/30%. They’ve valued 100 RSUs as being equal in value to 500 stock options. Every year I have the choice of taking 75% RSUs/25% Options, 50% RSUs/50% Options, or 25% RSUs/75% Options. So I might have the choice of 750 RSUs/1250 Options, 500 RSUs/2500 Options, or 250 RSUs/3750 Options. My general conclusion has been that if I’m confident I’m going to be there for 3 years, 75% higher RSUs are a better deal, but if I think I might leave after 1 or 2, it’s better to go heavy options since RSUs won’t vest over that timeframe.

  19. Maria says

    So what happens if I had stock grants that vested and I didn’t do anything with them? Will they always be available for me to sell?

  20. Harry Sit says

    Maria – Vested stock grants are yours to keep. You can sell them at any time, even after you leave the employer. Stock options are different. They have an expiration date even after they are fully vested. Expiration date accelerates when you terminate employment.

  21. GUNDOGAN COSKUN says

    I am new to job offers with RSU benefits.
    can someone explain me how RSU is calculated?
    is it montly salary or the annual gross-cum that is put on my package with certain percentages?

    thanks,

    gc

  22. Mark Pottsdam says

    Had a similar situation recently, looking at a new job offer and weighing up the pros and cons of walking away from unvested shares held as part of a deferred bonus due to vest in the next couple of years. I found out that my boss had needed to make the same type of decision a few years back, whether to leave my old firm or not, I realised that he and several others above me were now waiting year after year for deferred remuneration to be paid to them. It was clear to me that it was very unlikely that any of the 3 or 4 people immediately ahead of me were likely to leave the firm any time soon as they had too much to lose. Two things occurred to me, first It would be a long time before I really got to rise up to the responsibility that I know I can handle and that would drive me insane and secondly I would feel miserably trapped if I knew I had to sit in the same chair and listen to the same old BS just because I felt that leaving would cost me financially.

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