My company stock price is down. What should I do with my RSUs?

Daniel Lee, CFA, CFP®

Many clients with Restricted Stock Units (RSUs) are looking at a lower stock price right now and wondering how this impacts their overall compensation. After multiple conversations on the subject, I wrote this article to walk through RSU basics, two misconceptions of holding shares after they vest, and how to make smart RSU decisions in the context of your broader financial plan.

Basics of RSU Compensation

RSUs are a form of equity-based compensation. Your employer may grant a specific number of RSUs with some type of restriction, such as remaining in your job for a specific length of time. There is no tax at the time of grant since the shares are not yet yours.

While RSUs have an estimated value at the time of grant, the actual value to you depends on the market price of your company stock when it vests. Let’s look at an example:

Emmitt receives a compensation package that consists of $75,000 in salary, and a grant of 4,000 shares of RSUs that vest quarterly over the next 4 years (250 shares per quarter). Shares are currently trading at $25/share, and Emmitt’s annual cash + equity compensation is estimated to be $100,000 per year.

The value of Emmitt’s actual compensation increases if the price of his company shares is higher than $25 at the vesting dates. His compensation could also be lower if the company shares decline in value by the vesting date.

How a declining stock price impacts the value of vesting RSUs

With the recent market decline, you may find that the value of your vested and unvested RSUs is not as much as you expected. To understand the tax ramifications, let’s continue with Emmitt’s example.

250 RSUs vested last quarter for Emmitt at $25/share. He held onto those shares and they have declined in value to $20/share. Emmitt will still owe ordinary income tax this year on $6,250 (250 x $25) even though the value of those shares is now only $5,000. Emmitt would recognize a capital loss of $1,250 if he sold these shares today. The capital loss can be used to offset capital gains or up to $3,000 of earned income.

Emmitt is also expecting 250 RSUs to vest shortly. Assuming his company stock is still trading at $20/share when it vests, he owes ordinary income tax on $5,000 (250 x $20). If Emmitt sells these shares immediately after vesting, there is no additional tax to him. If he sells the shares for a gain in the future, they will be taxed at the capital gains tax rates. If the price declines further, Emmitt will recognize a capital loss if he sells the shares.

Two bad reasons to hold RSUs after vesting

I typically see employees holding RSUs after they vest for two reasons. First, they mistakenly think there are tax advantages to holding RSU shares after they vest. The truth is: there is no tax benefit to holding the shares beyond the vesting date.

RSUs are almost always taxed as income in the year they vest. They are subject to ordinary federal, state, and local income tax, as well as payroll tax for Social Security and Medicare. Whether Emmitt receives $100,000 in cash salary, or a combination of cash & RSUs, the tax liability is the same. You can’t reduce the tax liability for holding onto the shares for a certain amount of time like you can with ESPP shares, so taxes are not a good reason to hold shares.

The second reason people keep RSUs after vesting is a behavioral bias called the endowment effect. Receiving RSUs is equivalent to using a cash bonus to buy your company’s stock. While it is rare to see an employee use all their cash bonus to purchase their company stock, it is not uncommon that the same employee will not sell any of their vested RSUs.

This is a classic example of the endowment effect. In a now famous experiment by Daniel Kahneman, Jack Knetsch & Richard Thaler, they showed that people overvalue and are more likely to retain an object they own than to acquire that same object regardless of its objective market value.

image showing the Endowment Effect, where things people own, they tend to value more

The best way to overcome the endowment effect is to have a plan in place for your RSUs before they vest. By building this plan based on your overall financial goals and broader investment portfolio, you can make strategic decisions regardless of what the market is doing when each block of shares vest.

Thinking about RSUs as part of your financial plan

Whether you should sell or hold RSUs after they vest depends on your overall portfolio and your long-term financial goals.

  1. Think of RSUs as one part of your entire portfolio

RSUs should be one part of a larger portfolio strategy. If your goal is to have a completely diversified portfolio, your strategy with RSUs could be to sell vested shares immediately and reinvest the proceeds in a diversified portfolio.

If you want to accumulate more of your company stock, your strategy may be to not sell vested shares. This could be a reasonable strategy as long as you limit your company stock holdings to a set percentage of your overall portfolio.

While each individual situation is different, a concentrated position in any one stock can be risky. Use the BrightPlan Single Stock Concentration feature to see what percentage of your total portfolio is invested in single stocks, including your employer’s stock. We consider anything more than 10% of your portfolio in a single stock to be a concentrated position that could pose an unnecessary investment risk.

The decision is up to you, but setting an upper percentage on how much of your portfolio you want to be in a specific company can help you to make rational stock sales, instead of emotional ones. It is helpful to remember that a considerable amount of your human capital is also tied to your company, and the total exposure to your company goes beyond just stocks. Revisit your RSU strategy if you are accumulating vested RSUs while already having a concentration of your wealth tied to your company stock. You might be exhibiting the endowment effect.

  1. Think of RSUs in Terms of Your Financial Goals

Because they typically vest in large chunks and you have to wait for them, it is natural for people to think of RSUs as a forced savings plan for a big future goal, like a down payment on a home. It is particularly exciting if your RSUs gain in value before they vest.

But once the shares vest, pay close attention to when you will need to use them. It is risky to hold a large sum of money you need soon in a volatile investment like a single stock. If the stock price falls, it puts your goal in jeopardy.

You should revisit your strategy if RSUs are being accumulated to help fund a short-term goal, such as a home purchase in the next 12 months. Accumulating vested RSUs can be an aggressive and risky investment and it is misaligned with a short-term goal. On the other hand, allocating a part of your portfolio to your company stock for long-term goals like retirement or general wealth accumulation could be appropriate.

Read more: Navigating a Bear Market with Goals-Based Investing

Create a plan to benefit from your company stock ownership

Ownership of company stock through RSUs can be a great win for both you and your employer. Creating a plan to maximize this benefit is especially important in volatile times like right now. By setting goals and tracking your stock plan account in BrightPlan you can see if you have a concentrated stock position, and discover a recommended investment plan for each of your goals.

Staying disciplined is critical to achieving your financial goals. While there is no magic spell that can make all of your worries disappear, a solid goals-based financial plan with an appropriate investment strategy can certainly help.

If you want to face market volatility with confidence, sign in and schedule a call with an advisor today to discuss your custom goals-based financial plan.


Disclaimer: This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.