AbbVie’s LTI plan works through the granting of Restricted Stock Units to employees – the value of which is gained over time as these grants vest.
Restricted Stock Unit grants (RSUs) are a type of employee compensation that is commonly offered to employees once they reach a certain tenure or seniority level. These grants will give an employee a specific number of AbbVie shares after a vesting period.
After that period is up, the employee can decide to hold the stock in their accounts or sell and get cash. AbbVie provides these grants to employees each February.
For the RSUs to become of value to an employee, there are some conditions that need to be met. The RSUs vest over three years, with 33% vesting each year.
For a grant to become fully vested, an employee must stay with the company for three years after the initial grant date.
While there is a period to wait to get a financial benefit from these RSUs, it does help that once you have several grants issued to you, various shares from different grants will vest in the same year, so the financial impact of working for AbbVie snowballs once three grants have been issued.
For AbbVie, there are several benefits to offering RSUs to employees. For one, they can serve as an incentive for employees to stay with AbbVie and contribute to its success. By tying the vesting of the RSUs to a three-year timespan, the company can encourage its employees to stay with the company and contribute to its growth.
Additionally, RSUs can serve as a form of deferred compensation, allowing employees to participate in the company's success without having to worry about upfront costs.
There are also tax implications to consider when it comes to RSUs.
Briefly stated, the Internal Revenue Service (IRS) treats RSUs as taxable income, but only when they vest. This means that employees will not have to pay taxes on the value of their RSUs until they become vested and receive the shares in their E*Trade account.
The nice thing about RSUs is that most, if not all, of the tax bill is paid by withholding a certain number of shares from the grant. Just like taxes are withheld on a salary by AbbVie on a paycheck, the same is done on the payout of RSUs. If the grant was 500 RSUs, an employee may only receive 400 in their E*Trade account, as the 100 will be used as withholding for the tax bill.
There are also other considerations to keep in mind when it comes to restricted stock options. For example, if an employee leaves the company before their RSUs vest, they may forfeit their right to receive the shares.
Additionally, if the company's stock price declines significantly, the value of the employee's RSUs may be worth much less than they anticipated.
In summary, RSUs are a useful tool for companies to attract and retain top talent while also incentivizing employees to contribute to the company's success. While there are certain restrictions and tax implications to consider, these options can be a valuable form of compensation for employees.