Restricted Stock Options

Restricted stock options have gained a position due to their advantages over common stock. In the last years, there has been situations in which unethical employees have used inner knowledge of their companies for selling or buying stock at critical points in time. With restricted shares and accounting for restricted stock, this kind of occurrences simply disappear. But how do restricted stock options work and what they are, will be explained in the following paragraphs.

What Are Restricted Stocks?

Also known as letter stocks or restricted securities, it is a special type of stock. Regular stock can be bough or sold by their owners whenever they want. Their only limitation is the ups and downs of the market. There are several stock markets in the world dedicated to this kind of transactions. For example, the New York Stock Exchange (NYSE), the London Stock Exchange (LSE) or the Shanghai Stock Exchange (SSE).

In restricted stock systems, the stock can't be transferred by the owner of the stock. The only way in which they can do use it when certain milestone or period of time has been reached. Since this kind of stock depends a lot on the performance of the employees of the company, it is replacing the role that common stock had for executive's compensations.

Advantages Of Restricted Stocks

So, if you are an employee of a multinational corporation, how does it work for you? Simple. Usually, people who work inside organizations have the benefit of buying stock at a special price. Many people would think that it is an excellent business since, if they had a 3% discount, they could make a profit of 3% by only selling the shares that they have just bought. But corporations aren't dumb. That's why they impose certain restrictions to the stock sold to employees.

For example, if you are a CEO and a big chunk of your compensation is paid in shares, it is in your best interest to raise the value of the share before you sell it. In order to give an incentive to the executives, determined milestones are pre-arranged. It may be determined by the time that the person has owned the stock, by the time the individual has worked for the company or by a determined achieved goal, like a 50% increase in gross revenue.

Another interesting advantage of restricted stock options is that they can include dividend or voting rights (this is a decision that only the company can make). In the case of dividends, the owner of the restricted stock can has the right to receive profits of the company (even if he can't sell his stock). In the case of votes, he can attend the annual stockholders meetings and vote for the matters he cares the most.

Finally, there is restricted stock taxing issues. When an employee receives common stock as part of his compensation, these shares are subject to taxes, according to the Internal Revenue Service (IRS). That doesn't happen with restricted stock. Since the employee hasn't still obtained any benefit from the stock, he won't need to pay any taxes for it.

Continue to: Disadvantages of Restricted Stocks

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