In this episode of the Resilient Investors podcast, Kim and I explore the intricacies of Restricted Stock Units (RSUs) and their impact on modern compensation. We discuss the findings of our comprehensive white paper, shedding light on how RSUs serve as both a powerful retention tool and a potential financial trap for employees. The discussion covers the volatility of RSUs, the influence of tax laws, and the psychological effects of confirmation bias on financial decisions. With insights from our research and personal experiences, we offer actionable advice on managing RSUs effectively, emphasizing the importance of diversification and strategic planning. This episode is a must-listen or a must-read for anyone navigating the complexities of equity compensation.
Here is the full transcript of the podcast.
Victor Gaxiola:
Welcome to the Resilient Investors podcast. We have a very important and great subject to talk about today. We're talking about RSUs. This is a huge part of modern compensation for many people, but often misunderstood. Restricted Stock Units, or RSUs, will be breaking down the findings of a white paper that we had written and gotten some data working with Drive Research last year. Helping us kind of unpack a lot of the white paper and the content within it is Kim, who is our resident wealth planning, RSU expert. So, Kim, you're one of the hosts here in the podcast. Let's break it down. Let's talk about RSUs.
Kim Gaxiola:
Yeah, okay. Well, it starts with my, you know, I'm just excited to be doing this. I think long-term and the economist, I guess, in me is really interested in trends. And so one of the reasons why we decided to do this survey is because I was really curious what was happening in compensation for our clients and those people here in the Bay Area. You know, when we do financial planning, the first thing that, or, actually the last thing that people tell me after we've done all the planning and can look at the future of what to expect is to happen, people ask what could go wrong with my plan. Because restricted stock units are such a large portion of our clients' assets, I always talk about the fact that we can't control what we don't have control over, which is compensation.
Kim Gaxiola:
And I remember back in the late 1990s, early 2000s, when they changed compensation and no longer had stock options. That was a big loss for employees here in the Bay Area because they no longer had this great compensation. And a lot of that changed because of policy change at the large level here with tax law as well as it trickles down to companies. So restricted stock units are just that. They're restricted stock in a company. And that means that you don't own those restricted stock units until you vest. And so every year, typically when you sign on to work for a new company, they will give you some restricted shares that have a vesting schedule.
Kim Gaxiola:
And either over a monthly, quarterly, semi-annual period of time, those shares will vest, usually three to five year period. And then as you work for a company every year, sometimes you're given more as part of your performance review or you get a job promotion, many ways you can get more restricted shares in your company. So as you are adding or the company is giving you more restricted shares, you are subject to more vesting schedules, and your compensation can go up quite a bit from year to year.
Victor Gaxiola:
Yeah, so the research that was conducted by Drive Research and one of the catalysts that actually drove the research was we wanted to get a barometer and kind of get a gauge of where restricted stock units were sitting as a form of compensation, not just in the tech space, but across multiple industries across the country, just to get a sense of like, what is the trend? What is the pattern? Where are we seeing it go? And so one of the things that really came out, and it's the first area that we cover in the white paper is we call RSUs or one of the terms that we use is it looks like a modern day golden handcuff. So looking at the basics, what does that mean and how can RSUs become such a powerful retention tool for companies?
Kim Gaxiola:
Yeah, so you're handcuffed to the desk or to the company, right? It's literally a handcuff, meaning the company has you for a while if you are very mindful of the restricted stock value. So it's not uncommon to see here in our area somebody have maybe vested shares in their RSU account of maybe 250,000, but their unvested shares may be a million dollars, 500,000, 2 million, you know, and so forth. And I don't know about you, but I think it's very hard to walk away from a million dollars if you have an account that shows that that could potentially be yours. And so if you were to ever leave that company,
Victor Gaxiola:
Mm-hmm.
Kim Gaxiola:
You could be walking away potentially from millions of dollars. So that's how they handcuff you.
Victor Gaxiola:
Well, and according to the research, about 89% of employees received new RSU grants last year. Many with vesting schedules were actually paying out sooner. So companies are really using these grants to keep employees and this really deepens their financial connection to the employer in many cases. And so in thinking about the hope and the uncertainty of equity compensation, we highlight this dilemma that comes up. And that is the dilemma between balancing hope and uncertainty.
Victor Gaxiola:
Which is why, whereas, you know, a lot of the employees saw the value of their RSUs increase last year. What are some of the main causes that could change, you know, the value of the RSUs and why is this form of compensation considered volatile?
Kim Gaxiola:
Yeah, well, because a lot of times it's dependent on tax law. So any policy changes that that was what I brought up when everybody was high on stock options. And now it seems like stock options are less seen and sometimes more in private companies. But policy change can happen at any time. And there's a trickle down effect that happens at a company level with benefits.
Kim Gaxiola:
Benefit changes happen all the time. Employment is a commodity, Employers are either high in demand for qualified skill labor or they have too much of it and they don't need any more. And it's all a market and supply and demand.
Kim Gaxiola:
If an employer did not have to pay as much because they had plenty of employees there and the whole industry changes, then they would change. So these things can change on a dime. Know, one of the things I hear often is, I'm okay at my company. If things get bad, I've got recruiters calling me and the next company will give me the same amount of RSUs just to bring me over.
Kim Gaxiola:
That may have been true two years ago, one year ago, it may not be true tomorrow or next year. Is, know, compensation is supply and demand like any other commodity.
Victor Gaxiola:
One of the other facets of balancing hope and uncertainty when it comes to equity compensation, and I think it's an area that you like, or at least have talked about, both experienced through the white paper and the research, but also in personal experience working with clients, is this idea of confirmation bias, where employees will overestimate the company's and the decisions. How does that drive decisions when it comes to confirmation bias?
Kim Gaxiola:
Yeah, we all think because we know something that we know we're going to know before it goes bad, right? We'll see the signs that things are going bad and can sell before the tide turns. And that's just not so. Think the more we know something, the more we think we know.
Kim Gaxiola:
Something and you know if you're working for a company leaders are paid to motivate incentivize and keep you happy and Talking negative things talking about the challenges are are kind of depressing and down And if they're trying to motivate that may not be the things that they're talking about
Kim Gaxiola:
And so it's very hard for you to actually really know what's going on under the hood at your company, unless you are the controller or the CFO or what have you. It's very hard to do. I think about in our industry, remember back in 2008 and 2009, our employer when we were working in a broker dealer, had nothing but positive things to say about our financials.
Kim Gaxiola:
And even though they were saying positive things about our financials, they were forced to sell to another bank because a lot of broker dealers and big banks that had broker dealers were in terrible shape when it came to the mortgage side of their business. So just because you think you know something, just because your company is telling you something,
Kim Gaxiola:
May not be the underlying thing going on at that company. I very well remember that time when what they were saying was not actually what was really happening in the books. And I think that confirmation bias for people in other industries happens too, where they think they know everything, but they don't. And even if the company is doing well, you can't control when some crazy thing is going to happen.
Kim Gaxiola:
Geopolitical or of other nature, that's just going to bring all stocks down. And the ones that go up the fastest are the ones to go down usually the fastest.
Victor Gaxiola:
Yeah.
Victor Gaxiola:
Yeah, so RSU and RSU compensation is very deeply tied to the profitability and the ability of the company to maintain, you know, that financial stability to continue paying those grants or also, you know, providing new grants. The research also pointed out that while new RSU grants make employees more likely to stay, they can also lead to the employees feeling trapped. So how can this feeling of being locked in financially really impact the employees morale and maybe even their engagement at work?
Kim Gaxiola:
Yeah, because nobody wants to walk away from 500,000, a million, and so on and so forth of money. And so you just deal, right? And you hang out because every day the clock ticks, you may be vesting in more shares. And so it can really ruin morale. It's a problem. It could be a company wide problem too, if everybody's kind of in the same boat and there's nowhere better to go.
Victor Gaxiola:
Yeah.
Victor Gaxiola:
All right, so let's talk about some of the common mistakes and more importantly, how do we avoid these common mistakes? So let's look into some actionable advice here. So the white paper outlines some very common mistakes that employees will make when managing their RSUs. So, but in your experience, what is probably the single biggest mistake you can see people make?
Kim Gaxiola:
Yeah, I would say relying too heavily on this asset for your overall wealth. You know, because it all comes down to it's so great to see that piling up and your net worth going up. But again, it comes down to do you want to be so dependent on one single company?
Victor Gaxiola:
Mm-hmm.
Kim Gaxiola:
For your salary and for your net worth and your assets. I think it's highly risky. And the second thing to go along with that is avoiding doing anything because you live in this fear of, don't want to pay any more taxes. Go ahead.
Victor Gaxiola:
Yeah, in the- No, I was going to say the survey actually showed that 54% of those who responded on average maintain that RSU and the company's stock where it's only a smaller percentage, which is a little less than half. 46% were actually diversifying, selling the stock and buying and diversifying their assets and their portfolio.
Kim Gaxiola:
Yeah, and a lot of times it's because what else would I do? You we also get that question. I've sold my shares, my RSU shares that are invested. What do I do now with that money? And, you know, I still, it's unfortunate. Probably the people that sell, I actually want to ask another question is, are you selling that because...
Kim Gaxiola:
You need to pay your property taxes or the kids tuition or what are you using that money for or are you selling because you're going to diversify away and put it in other things so you still have an asset that can continue to grow but not being so highly dependent on one single company. So that actually should be a question in our next survey, right? Is to find out why are they selling? If you're selling it to, you know,
Victor Gaxiola:
Yeah.
Kim Gaxiola:
To diversify out, great. But if they're selling it to use for normal expenses that come up every year, and maybe they're not the same expenses, but they're large expenses no less that come up every year, well then you might find yourself in real trouble if the compensation package changes.Victor Gaxiola:
Right, right. So Kim, let's pivot over to some solutions because we kind of presented and outlined, know, set the table for some of the challenges, some of the mistakes that people are making, but we did want to unlock the full potential of the RSUs for people. So we do provide a very clear roadmap for managing your RSUs effectively. And the first step is to sell strategically and diversify for stability. So what does that look like in practice? And we've done this for other people in the past.
Victor Gaxiola:
What does that look like?
Kim Gaxiola:
Yeah, multiple ways. I wish I could help people the minute they sign that contract with that company and guide them through what to do so they don't become so over dependent on one company for their net worth. But a lot of times the reality is they have accumulated all of this. And so there may be different strategies. I would say seek help. Every situation is different.
Kim Gaxiola:
Based on your own financial situation. Work with your financial advisor or financial planner, work with your tax person. And even sometimes when we start talking about the five to 10 million net worth, bring in that attorney that's really good at estate planning. We can do some really creative stuff if it's going to be a very high tax bill.
Kim Gaxiola:
That will help you and help your family in the future and minimize some taxes if it's gotten to that point where you have a garden and you let it go and it grows, overgrows and there's weeds in it and it's really hard to cut. So I would love to say start working with an advisor as soon as you start with that company and are receiving that compensation. But if you haven't done that,
Kim Gaxiola:
It's not too late to make sure you have your advisors and the bigger that value is, probably the more different types of advisors you need from the tax and the attorney.
Victor Gaxiola:
Yeah, so starting or starting early, engaging with your advisor, bringing them into the decision. You oftentimes when the offers come in and you're in a position to actually kind of identify the offer, review the offer, you want to take a look at what that compensation is going to look like. And so I think one of things that the white paper had suggested, and I think I've heard you say this, is that it helps to treat the RSU almost like as an annual bonus if it's available to you.
Kim Gaxiola:
Okay.
Victor Gaxiola:
And really, think the mindset there is to look at how can you use this to build that long-term wealth. So, yeah.
Kim Gaxiola:
Yeah. And so if you really want to get started, it starts with what you do on Vesting Day. And I always hear the excuse, I can't do anything on Vesting Day. It's a blackout period. And we haven't touched on that, but that kind of complicates things a little bit. It means that maybe the day you vest, you can't exactly sell it that day.
Kim Gaxiola:
But as long as you do it, as soon as that blackout period is lifted, then you are being disciplined.
Victor Gaxiola:
So Kim, for listeners that might be hearing and thinking, you know what, I might be too concentrated in my company's From your perspective, what would be the first practical steps they should take to start building a much more resilient and well diversified portfolio?
Kim Gaxiola:
Yeah, well, have a plan. I would say it's really hard to take any sort of action if you don't have a plan. I'm just going to tell you, it's like cooking. I see all the ingredients in my refrigerator, but unless you put a creative little recipe in front of me that looks really good and makes me hungry, I'm probably not going to do anything with all that stuff.
Kim Gaxiola:
And so, you know, same thing with your RSUs. Create a plan and start with the end in mind. What do you want to do when your money works for you? You know, that's our tagline. Think about it. Because as soon as you have a vision of what you want to do when you're not beholden to a company and scared you're going to lose your job because you need that income,
Kim Gaxiola:
Think about that. Think about being financially independent and how much better you will feel. And then work your ways backwards with creating that plan to diversify out, manage the new vesting periods, manage your sales, and manage getting out of the stock eventually.
Kim Gaxiola:
We have a lot of tools to use to mitigate risk if you have too much and you just can't sell it all in one year because of the tax consequence. There are things like options overlays that we can use in order to protect some of the value of that from a major market upset or a bad thing happening at your company. But you need to have advice because those strategies are pretty complicated and you
Kim Gaxiola:
You can't manage what you don't know. So understand what the tax bill is going to be and prep for it.
Victor Gaxiola:
Well, this has been extremely insightful. And just to recap for those that are listening, that the key is really to be proactive, I think. Understanding the risks of concentration and having too much in company stock. And more importantly, having a real clear strategy for diversification and tax planning. So the tax planning is really important. So, Kim, thank you for breaking down the white paper. Like I mentioned, the white paper is currently available on our website at resilientplanning.com.
Victor Gaxiola:
You can find it there. You can also find it on our show notes. So what we'll do is we'll add a link to the actual white paper. Like we said, we did this over the course of a couple of months. Our plan would probably be to repeat it just to see if there's any trends or changes in the patterns regarding RSU compensation and can mention additional questions that I think we can ask. So if you want to do a deeper dive, find the white paper and of course,
Victor Gaxiola:
If this is something that you are concerned about, I want you to think of the Resilient Wealth Planning team as your coaches and advocates when it comes to maximizing your compensation. Kim is, like I said, our resident experts on all things RSUs, but we also have the good fortune of having Carolyn Rollin, who is a tax planner, enrolled agent, so she can help a lot with conversations regarding tax planning and the implications of selling and what kind of a tax bill that might generate.
Victor Gaxiola:
And then we have the tools in order to assess and help you with making these key financial decisions when it comes to your compensation. So Kim, any final thoughts?
Kim Gaxiola:
Yeah, this is manageable. Even though it seems complicated and stressful and sometimes we put off what we're most worried about, I don't want you to be. It's manageable and you have a team of experts and if you don't know who that team is, you should be calling because we have a wonderful team and when the numbers get bigger and you're relying more and more of your wealth on one single stock.
Kim Gaxiola:
In one single company. There are a lot that you can do and we can bring in our resources with our expert attorneys and tax professionals in order to help you. But it starts just with a call. And I think we're approachable.
Victor Gaxiola:
Well, definitely approachable and I'm reminded the fact that it's not so much what you make, it's what you keep that really matters because that defines the lifestyle that you're gonna have in retirement. And that's really what we're all about is, you know, helping you answer that question is what will you do when your money works for you? Well, we can help you with that answer. So thank you again, Kim, for like unpacking the white paper. I encourage people to download it, take a look at it. If you have questions, reach out to our team. Multiple ways to get ahold of us through our website. You can also email me.
Victor Gaxiola:
At victor at resilient planning.com. And of course, we hope that you'll continue listening to the resilient investors podcast and that you're getting a lot of value from these podcasts as we continue delivering and adding new shows about every two weeks. So thank you for joining us today. We hope you'll join us in the future.
Kim Gaxiola:
Thank you. And for those of you who even answered our survey, thank you for doing that. Stay tuned, because we probably will be doing these on an ongoing basis to see what is changing in the compensation. So stay tuned.
Victor Gaxiola:
Stay tuned. We'll see you soon.
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