Besides ample sunshine and peak vacation season, summer represents a perfect time to plan for an important upcoming decision-making period for many NIKE employees. Starting at the E band level, the election of Restricted Stock Units (RSUs), stock options, or a mix between the two will be available. To help you prepare, let’s discuss some key factors that separate these two deferred compensation methods that should be considered. Let’s start with the basics regarding each method.
- Restricted Stock Units (RSUs)
Restricted Stock Units, or RSUs, are considered a less complicated and less risky form of deferred compensation than stock options. You’re granted a set or “lot” of restricted stock units, which will eventually vest and the NIKE shares will automatically be deposited into your Fidelity account. You can choose to keep the NIKE stock or sell the shares. RSUs will always have net value unless the company stock is $0 at the time of vesting.
The total market value of the vested RSUs is taxed as ordinary income when you receive the shares. After delivery, if you hold the stock for one year and one day, the additional gain (if any) will be taxed at long-term capital gains levels (usually 15% or 20%). If you sell the stock before that, the additional gains are taxed as ordinary income.
- Stock options
There are a few different types of stock options, but we’ll be discussing NIKE’s Nonqualified Stock Options (NSOs). NSOs are contracts that give you the option (but not the obligation) to buy NIKE stock at a set price, the “grantprice,” which is stipulated when the option is granted to you. The goal is that over time the value of NIKE stock increases and when it’s time to exercise your option, the value is higher than when you were granted the options and you are able to buy the shares at a discount. Stock options are generally considered riskier investments because if the stock is worth less than the grant price when you exercise the option, then the options are worthless. Notably, these options expire after ten years if not exercised, which would again lead to the option being worthless.
The difference between the market value and grant price will be taxed as ordinary income. At exercise, there is usually a simultaneous purchase and sale of NIKE stock. While the default action is to immediately sell the stock, it may be advantageous to retain the stock for a year and one day for long term capital gains tax treatment rather than ordinary tax treatment on any further gains after exercise. Your advisor will be able to help you assess if this strategy fits your goals.
- What do I elect?
Key factors affecting your choice may be:
- Your risk tolerance
- Your Liquidity needs
- Your Age
- Portfolio diversification needs and/or concentration of NIKE stock
- Taxation including desired flexibility to control taxable income
- The future outlook of NIKE
- Potential plans to leave the company
As with all major financial decisions, it’s important to speak with a trusted professional such as a CERTIFIED FINANCIAL PLANNER™ Professional. It never hurts to check with your CPA also since both RSUs and NSOs come with increased tax liability. Your advisor should be able to help you to determine the best strategy for your individual circumstances. Speaking of individual circumstances, your circumstances may change year-to-year, so be sure to revisit this decision every year.