Stock options have been used as a part of employee compensation for years. Restricted stock units can be more valuable than stock options. RSUs are "grants" of company stock and typically retain some of their value even when company common stock prices decline. Most stock options have real value only if company common stock reaches a certain level, called a "strike price." If company stock never reaches this price, stock options are worthless.
Stock Options
Employers offering stock options are giving you the opportunity to buy a specific number of company shares during a stated period at a particular price. For example, an employer may offer workers the right to buy up to 1,000 shares of company stock at $12 per share for up to two years. If the stock increases to $20 per share during this period, exercising your options -- buying the stock at $12 -- is a wise decision. If the company stock price never goes above $8 per share, your options are worthless.
Restricted Stock Units
With RSUs, your employer is granting you, but not actually giving you, a specified number of company shares. The employer attaches a "vesting" requirement to the grant, and the worker must fulfill the requirement before taking possession. This could involve working for the company for a specific period or achieving certain individual performance ratings. For example, your employer offers 2,000 RSUs valued at the then-current stock price of $10 a unit. Therefore, the value of the RSUs is $20,000. To meet the vesting requirement, you must still be employed by the company three years from the grant date. At that time, your employer will hand you $20,000 cash or the number of shares equal to $20,000 at the current stock price.
Stock Option Benefits
The employee gets the opportunity to buy company stock at a discounted price. If the stock increases in price, the employee can make a substantial profit by buying at the lower price and selling some or all shares at the higher market price. The potential opportunity to make a windfall profit, without the usual market risk, through an immediate or future sale of employer stock is the primary benefit of stock options. The employee also has the right to become an "owner" of the company by purchasing company stock at a discount.
RSU Benefits
Because the employer grants RSUs to employees, they needn't worry about the volatility of company stock. Unless their employer goes bankrupt or ends operations, employee RSUs will retain some value. Because the employer is promising to "give away" its restricted stock, the worker need not spend money buying company shares. RSUs almost guarantee profit to employees, regardless of the stock market price. Another benefit for both employer and employee: The company has the option to pay the employee in cash or the appropriate number of shares.
Significance
Stock options and RSUs benefit the employer and employee. The employer typically retains talented employees, who want the opportunity to become company owners or achieve high profits on stock sales. Employees have the potential to earn more income on top of their regular compensation. Once they exercise their stock options or earn their RSUs, they become part-owners of the company with rights equal to all other shareholders.