Particulars on Restricted Stock Units
Cummins has recently rolled out its new Restricted Stock Program (RSU) for employees. While an exciting opportunity for a lot of people, we continue to receive questions from clients, family, and friends about what they are and how they work. At WWA, we love to share what we know and help people figure out how best to maximize their employee benefits, with a particular expertise with Cummins employee benefits.
So, what is an RSU, anyway? In short, RSUs or Restricted stock units are a way for Cummins to grant you shares in the company. You will get an award with a number of RSUs and a vesting schedule. You can calculate the current value of your RSUs by simply taking the number of units you have and multiply by the current stock price. Key thing to remember is: your RSU value changes as the stock price increase or decreases.
RSUs awarded: 24
Cummins share price as of close 10/24/22: $233.56
24 x 233.56 = $5,605.44
RSU value at close 10/24/22: $5,605.44
RSUs are similar to other equity compensation programs, like Long Term Grants options and shares; however, the great thing with RSUs is that they are almost always worth something. Options have a price at which you can purchase a share of the stock, known as the “strike price”; however, the problem is that the strike price may be above the stock price, so the option is effectively worthless. On the other hand, an RSU is simply Cummins saying, “when your grant vests, I’m going to give you a share of stock” which means regardless of what the value of the stock is today, the RSU is worth something at the award date or the vesting date (unless of course the stock is worthless, and then we have other problems to deal with).
Aside from the number of units provided, the award will also indicate the vesting schedule. This schedule will clue you in to how the shares will be delivered to you. These schedules vary widely from company to company, including cliff events, where certain criteria are met to fully vest the shares, or, in the case of Cummins award, they come in a graded scheduled of fractional tranches on specific dates. For example, 1/3 on 10/3/2023, 1/3 on 10/3/2024, and 1/3 on 10/3/2025. Using the example above, you would plan to receive 8 of your 24 shares on 10/3/2023, 8 on 10/3/2024, and the final 8 on 10/3/2025. In most cases, as is with the case with Cummins, you are required to be working for the company at the time of vesting to receive your shares.
As with most things related to compensation, you will owe taxes on your RSUs; however, the great thing is that you won’t pay taxes until you receive the share units. You may be given the option to “pay to cover” or tender part of your shares to the taxes due, which is generally at a fixed rate of 22%; therefore, you may owe additional taxes if you are in a higher marginal tax bracket. This means that you surrender part of your grant back to the company to pay the taxes. The value you receive will show up on your paystub, and you will pay at income tax rates along with Social Security, Medicare, and local income taxes.
Some other things to note about your Restricted Stock Units:
- For most companies, as is the case for Cummins, you will need to formally accept your RSUs. This can be done through your Morgan Stanley platform where you would view your Employee Stock Purchase Program or Long-Term Grant options.
- Since these are restricted stock units and not restricted stock, you do not receive any shareholder rights or dividends until you’re vested.
- From a diversification perspective, RSUs drive additional portfolio exposure to your company, regardless if you are vested or not. You will want to consider how these additional shares fit into your overall portfolio and risk profile.
RSUs are a simple and effective benefit that companies, like Cummins, can provide to their employees to tie employee portfolio performance to the company’s performance. There are employment, tax, and investing considerations when you receive this type of compensation, so it’s worthwhile to discuss how these fit into your financial plan with your financial advisor. WWA is always available to discuss employer benefits, whether Cummins or otherwise, to help you maximize your benefits.