While stock options like ISOs, NSOs, RSUs, and ESPPs are widely known, some companies offer other forms of stock-based compensation that provide unique opportunities for wealth-building. Understanding these less common options—Performance Stock Units (PSUs), Phantom Stock, Stock Appreciation Rights (SARs), and Restricted Stock Awards (RSAs)—can help you make informed decisions to maximize the value of your compensation package.
In this guide, we’ll break down each of these types and their tax implications, so you can determine how they might fit into your financial journey.
1. Performance Stock Units (PSUs)
What Are PSUs?
Performance Stock Units, or PSUs, are similar to Restricted Stock Units (RSUs) but come with an added layer: they only vest when certain performance criteria are met. These criteria are usually tied to company performance metrics, such as revenue, profitability, or even individual achievements. Once the performance targets are met, the PSUs vest, and you become the owner of the shares.
Why PSUs Matter
PSUs align employee rewards with company success, making them a powerful tool for incentivizing high performance. They’re commonly offered to executives and senior employees whose roles directly impact company outcomes. PSUs add a performance-based element to compensation, giving employees the chance to share in the company’s growth.
Tax Implications of PSUs
PSUs are taxed as ordinary income upon vesting, based on the fair market value of the shares at that time. Any subsequent gains or losses from holding the shares are subject to capital gains tax.
Example:
Let’s say you receive 1,000 PSUs that vest only if the company achieves a revenue target within three years. When the target is met, and the shares vest, each share is worth $50, resulting in $50,000 of ordinary income. If you sell the shares immediately, there’s no additional tax. However, if you hold them and sell later at $70 per share, the additional gain is taxed as a capital gain.
Truly Aligned Insight:
PSUs reward long-term focus, aligning your goals with the company’s. At Truly Aligned, we encourage clients to treat PSUs as an opportunity to invest in their future, but to be mindful of concentration risk by diversifying when appropriate.1
2. Phantom Stock
What Is Phantom Stock?
Phantom stock provides employees with a “phantom” (or virtual) share of stock, mimicking the value of real shares. While employees don’t own actual shares, they’re awarded cash bonuses or stock equivalents based on the company’s stock performance.
Why Phantom Stock Matters
Phantom stock is often used by private companies or organizations that don’t want to dilute ownership. It allows companies to offer stock-like rewards without actually issuing shares. Phantom stock can be an effective tool for retaining talent, especially when paired with long-term incentives.
Tax Implications of Phantom Stock
Phantom stock is taxed as ordinary income when paid out. Since no actual shares are owned, there’s no capital gains treatment.
Example:
Suppose you’re granted 500 phantom shares at a starting value of $20 per share. If the stock value rises to $60, the phantom stock value increases to $30,000 (500 * $60). You would receive this as a cash bonus and pay ordinary income tax on the amount when it’s paid out.
Truly Aligned Insight:
Phantom stock can be a valuable source of income, especially for employees of private companies. We recommend considering it as part of a larger compensation and wealth-building strategy, using the payout to diversify investments and build long-term financial stability.
3. Stock Appreciation Rights (SARs)
What Are SARs?
Stock Appreciation Rights (SARs) allow employees to benefit from the increase in company stock value without actually buying shares. SARs pay out the increase in stock value from the grant date to the exercise date, usually in cash or equivalent shares.
Why SARs Matter
SARs offer a valuable upside, allowing employees to benefit from the stock’s appreciation without needing to exercise options or invest upfront cash. They’re often used as an alternative to stock options, especially in private companies.
Tax Implications of SARs
SARs are typically taxed as ordinary income at the time they’re exercised, based on the value increase from the grant date to the exercise date. Like phantom stock, there’s no capital gains tax treatment since SARs do not involve actual shares.
Example:
Assume you receive 1,000 SARs with a starting stock value of $30 per share. Over three years, the stock value rises to $70 per share, resulting in an appreciation of $40 per share. If you exercise your SARs, you would receive $40,000 (1,000 * $40) in cash or stock equivalent, which is taxed as ordinary income.
Truly Aligned Insight:
SARs provide growth potential without requiring an initial investment. We view SARs as a beneficial way to participate in your company’s success, but we advise clients to use SAR payouts to diversify and build a balanced financial plan that supports both current and future goals.
4. Restricted Stock Awards (RSAs)
What Are RSAs?
Restricted Stock Awards (RSAs) are actual shares of stock granted to employees, but with certain restrictions. These shares vest over time, similar to RSUs, but RSAs are granted upfront as actual shares, often giving employees voting rights or dividends (even if the shares are not yet fully vested).
Why RSAs Matter
RSAs are valuable because they make employees part-owners of the company from the start, even if the shares are restricted. RSAs are more commonly offered in startups and private companies, as they grant immediate ownership and can be a powerful retention tool.
Tax Implications of RSAs
RSAs are generally taxed as ordinary income at vesting, based on the stock’s fair market value. However, employees can make an 83(b) election to pay taxes on the stock’s value when it’s granted rather than when it vests. This can be advantageous if you expect the stock price to increase, as future appreciation would be taxed as capital gains rather than ordinary income.
Example of 83(b) Election:
Suppose you’re granted 1,000 RSAs at $10 per share, and you file an 83(b) election to pay tax on the $10,000 value at grant. If the stock’s value rises to $50 per share over time, you’ll only pay capital gains tax on the increase from $10 to $50 when you sell.
Truly Aligned Insight:
RSAs with an 83(b) election can offer tax advantages if you’re confident in your company’s growth. Our approach is to weigh the risks carefully, as making an 83(b) election can be risky if the stock’s value drops. With planning, RSAs can be a solid foundation for long-term growth.
Truly Aligned’s Take on Less Common Stock Compensation Types
At Truly Aligned, we see these less common stock compensation types—PSUs, Phantom Stock, SARs, and RSAs—as unique opportunities to build wealth, often tailored to specific roles or company structures. While they may be more complex, each of these compensation types can serve as a powerful tool for aligning your work with your financial future.
Our approach is to help clients use these tools effectively within a larger financial strategy. With thoughtful planning and an understanding of tax implications, these less common stock options can support your journey toward financial stability and fulfillment.
Whether you’re navigating decisions around RSAs with an 83(b) election or considering the impact of SARs on your overall wealth, Truly Aligned is here to guide you in creating a balanced and aligned approach to your financial goals.
1 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.