Restricted shares – What is it, definition and concept

Restricted shares are aliquots of a company that, as the name suggests, are issued under certain conditions. Thus, a company grants these shares to its employees as a form of reward and, at the same time, as an incentive.

That is, restricted shares are participations within the property of a company that the company itself offers to its worker. Thus, the delivery of the titles becomes effective once certain conditions are met.

What restrictions are established for the award of this type of shares? We usually mean the following:

  • Employee Continuity: The worker must remain in his position for a specific period, for example, four or five years.
  • Performance: The delivery of shares can be conditioned to the achievement of certain objectives, such as the development of a new product or exceeding a sales level.

Characteristics of restricted shares

Among the characteristics of restricted shares we can highlight:

  • When the shares are offered, they are issued and once the agreed terms and conditions have been fulfilled, they are awarded to the worker.
  • The granting of these shares can follow a gradual schedule, that is, from 100% of the shares that are offered to the employee, the restrictions for 20% of those shares can be eliminated, for example, each year. Thus, at the end of five years, the worker will receive 100% of the shares.
  • Another option is for the employee to receive all of the shares at the end of the agreed term, for example, three years. That is, he does not receive any advance as in the previous point.
  • If the conditions established for the granting of the shares are not met, the employee does not receive them and they are returned to the employer.
  • Usually, the employee must pay a tax on the shares received. Each country has different regulations. In the United States, for example, there are two options: Pay the tax at the time of granting or when, once the established schedule has ended, ownership of the shares is acquired. That is, the worker can pay the taxes once he finds out about the offer of the restricted shares or when the company actually delivers them, for example, five years later.
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Advantages and disadvantages

Among the advantages of restricted shares we can highlight:

  • From the company’s point of view, they can serve as an incentive for workers to achieve certain goals and stay with the company.
  • From the perspective of the worker, these shares generally offer the payment of dividends, even before the consolidation of the total delivery of the shares is completed.
  • Another advantage for the employee is that these shares give the right to vote, of course, always in accordance with the percentage of participation granted.

Also, among the disadvantages of restricted shares we can point out:

  • As we have previously mentioned, the employee must pay a tax on the restricted shares.
  • For the company, this instrument in theory should serve as an incentive for the worker. However, there are other ways to motivate the employee without involving the company’s capital stock. And it’s not just about money, like a raise. A worker could value, for example, that the company cares about his emotional well-being, that it offers flexibility in schedules, that it provides training in new skills, that they give him a promotion, among others.

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William Westreicher, January 07, 2022
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