What Are Stock Refreshers & How Do They Work?

Stock Refreshers

Stock refreshers are equity compensation for existing employees, separate from initial hiring grants. They provide ongoing incentives and align employee interests with company success. They are an additional part of an employee’s total compensation, recognizing continued contributions.

How Stock Refreshers Work

Stock refreshers are typically Restricted Stock Units (RSUs). An RSU is a promise to issue company stock shares once conditions, usually continued employment, are met. These units convert to shares upon vesting.

Vesting schedules for refreshers often span several years, mirroring initial equity grants. A common structure is a four-year vesting period with a one-year “cliff.” This means no shares vest during the first year, but 25% of the grant vests on the first anniversary. After the cliff, remaining shares vest incrementally, often monthly or quarterly, over the next three years until fully vested.

Why Companies Offer Stock Refreshers

Companies offer stock refreshers for several objectives. One reason is employee retention. These ongoing grants incentivize employees to remain with the company beyond their initial equity awards’ vesting period, reducing turnover.

They also motivate high performance. Employees know their contributions can lead to future grants, tying efforts to financial rewards and encouraging productivity. Stock refreshers help companies maintain competitive compensation. Regular equity grants keep total compensation attractive in dynamic talent markets.

Refreshers also align employee financial interests with shareholders. As company stock value increases, so does the value of vested refreshers, fostering shared interest in company success. This encourages employees to act as owners.

Tax Implications of Stock Refreshers

Taxation of stock refreshers, especially RSUs, involves two stages: vesting and sale. When RSUs vest, their fair market value on the vesting date is ordinary income. This amount is added to taxable wages, subject to federal, Social Security, Medicare, state, and local income taxes.

Employers withhold taxes at vesting, often by selling shares or withholding cash. The vested shares’ fair market value is reported on the employee’s Form W-2 for that year.

Once vested, shares’ cost basis is their fair market value on the vesting date. Selling these shares may result in a capital gain or loss, calculated as the difference between sale price and cost basis.

Capital gains or losses are short-term or long-term, depending on how long shares were held after vesting. Gains from shares sold within one year are short-term and taxed at ordinary income rates. Gains from shares held over one year are long-term and qualify for lower tax rates.

Granting Practices for Stock Refreshers

Companies grant stock refreshers on a regular cycle, often tied to annual performance reviews or compensation cycles. Many organizations issue them once a year, usually after performance evaluation.

Grant size is influenced by several factors. Individual performance is a determinant, with higher-performing employees receiving larger grants. An employee’s role and level also play a part, as senior positions may warrant larger awards.

Companies also consider the market value of existing grants when determining refresher amounts. Company performance impacts the funds available for refreshers.

Citations:
Restricted Stock Units (RSUs): What They Are & How They Work. Fidelity.com. (n.d.).
IRS Publication 525, Taxable and Nontaxable Income. (n.d.).
Understanding RSU Withholding Tax. Charles Schwab. (n.d.).
Cost Basis of Stock. Investopedia. (n.d.).
Capital Gains Tax Rates. IRS.gov. (n.d.).