Amazon, Apple, Google: How Restricted Stock Units Are Evolving
What is a Restricted Stock Unit? By understanding how the equity compensation structure works, as a current or prospective employee, you’ll better understand how you’re getting paid and how you can invest more efficiently.
Have you ever wondered how much major tech companies like Apple, Amazon, and Google pay their employees? Although they might have competitively higher salaries, a hefty portion of their compensation comes in equity. By understanding how the equity compensation structure works, as a current or prospective employee, you’ll better understand how you’re getting paid and how you can invest more efficiently.
What is a Restricted Stock Unit? RSUs are an equity compensation method where employees receive company shares subject to a vesting period. This method helps align the interests of both employees and the company. These shares vest on a predetermined schedule, making them a variable component of the overall compensation package.
Variability, as an employee, can be both good and bad. For example, suppose you were granted 100 shares of Amazon stock instead of additional cash compensation in 2017; the price appreciation of Amazon stock over the next four years means your total compensation would be substantially higher than expected. Alternatively, suppose you were granted 100 shares of Amazon stock instead of additional cash compensation in the middle of 2020. In that case, the recent price decline means your total compensation may be below your target.
Amazon, Apple, and Google
The Effect of Market Volatility
We’ve experienced ups and downs of market volatility, forcing tech companies to adapt. As a result, things also had to change when it came to RSUs and general compensation structures. But how do these changes impact tech giants Amazon, Apple, or Google?
With Amazon’s meteoric rise from 2009 to 2021, they could keep base salaries capped at $160,000 (outside of NY and the Bay Area), as the RSU component of compensation meant that employees were consistently outperforming their total comp targets. However, with the recent drop in price, they were forced to evolve. Because such a significant component of employee compensation was tied to the stock price, and because the stock price is (as of this writing) trading 40% below its 52-week high, in February of 2022, Amazon decided to increase the maximum base salary to $350,000. For employees, this means potentially more fixed base salary compensation and less variable compensation in the form of RSUs.
Restricted Stock Unit Vesting Schedules
Different companies have different RSU vesting schedules. At Apple, RSUs vest 25%/year for four years (12.5% every six months). At Amazon, initial vests are 5% after year 1, 15% after year 2, and 40% in years 3 and 4 (20% every six months starting at 2.5 years.) Subsequent refresher RSU vesting schedules can vary. Amazon makes up for this backloaded vesting schedule by offering a Year 1 and Year 2 Sign-On bonus (virtually indistinguishable from additional salary as it’s paid out in equal installments over the year with your paycheck). If Amazon’s stock price is doing well, this entices employees to stick around for larger payouts in years 3 and 4 on the job.
One downside to RSU compensation that we run into all the time is concentration risk. The average employee who doesn’t have the guidance of a financial advisor will often allow their vested shares to continue to build up over the years. For many, they’re not only putting a large portion of their investing eggs in one basket – they’re multiplying this risk given that this is the company that they work for. For example, if a Peloton employee refused to sell their vested shares of Peloton, those shares would be (as of this writing) down ~90% of their January 2021 all-time high. Additionally, these individuals may be at risk of layoffs, as in February 2022 Peloton laid off ~20% of their corporate employees.
So how do we look to mitigate risk associated with concentration and help tech employees invest efficiently over the long term? There are a few methods.
How Can Employees Invest Efficiently?
Restricted Stock Unit Taxation
First, we need to think about RSU taxation. RSUs are taxed as ordinary income on the day the shares vest. This means that if your shares of Apple are worth $50,000 upon vest, you’re taxed on $50,000 of income, but if the price has recently dropped and your shares are only worth $35,000, you’re only taxed on $35,000 of income. What this also means is your cost basis is based on the share price when you receive the shares – so the easy answer is to simply sell the shares as soon as they vest. Doing so will result in little to no tax ramifications (barring a wild swing between vest and sale).
Cash and Asset Allocation
By selling RSUs upon vest, you’re freeing up cash to allocate elsewhere. For some people, this means putting money into a 529 college savings account. For others, it means paying down high-interest debt. For others, it might mean diversifying into 10,000+ stocks instead of remaining concentrated in the single stock of your employer. And for the savviest, it might mean replenishing cash to max out other employee benefits.
The best return you can get from an investing perspective is your employer’s 401(k) match. Amazon matches 50% of your first 4% contributed to the 401(k) (2% of salary), Apple starts by matching 50% of your first 6% contributed to the 401(k) (3% of salary), while Google matches a whopping 50% of your total contribution up to $20,500 ($10,250/year!) Additionally, all of these companies offer the Mega Backdoor Roth 401(k), which allows employees to save even more money into tax-preferred accounts each year. With that being said, these types of deferrals must come from your paycheck rather than an outside source, so to max out these benefits, you have to take home a substantially smaller paycheck. This is where RSUs come into play. By selling RSUs and living off the proceeds, you may be able to max out these additional buckets of tax-preferred savings – essentially swapping a concentrated taxable position (vested RSUs in company stock) for a tax-preferred diversified holding (401(k) or Mega Backdoor Roth 401(k) holdings.)
Setting Yourself Up For Success
Across the board, by understanding how RSUs work, the employee benefits available to you, and the importance of diversification and tax-efficient investing, you can craft a plan and an investment strategy that will set you up for a great deal of success as a tech employee. Furthermore, if you can work with a wealth planner to guide you along the way, you can develop a strategy that makes your money work for you!
This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.
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