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Money Cents

Compensation Components: Restricted Stocks
By Shelley Phillips-Mills
Apr 11, 2005 - 9:59:00 AM

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We all know compensation comes in many forms – not just your salary – and may include health care benefits, paid vacation and bonuses. Depending on the company you work for, and in many cases what position you hold, a portion of your compensation may come in the form of restricted stock. If you have been awarded restricted stock as part of your pay package, there are a few things you should know about how it works.

Unlike stock options, which give you the opportunity to purchase a set amount of shares at a predetermined price, with restricted stock you actually receive shares of the company. This type of stock is granted directly from the company to you, without being registered by the Securities and Exchange Commission (SEC). Because the stock has not been registered, it cannot be sold on the public market, which makes it restricted.

Ownership of restricted stock is much like vesting in your retirement plan – you can gain full ownership of your shares either all at once or a bit at a time. You typically have to hold this type of security for a set amount of time that typically varies from one to five years, before you obtain full ownership rights. However, during the vesting period, many restricted stockholders receive dividend payments and retain full voting privileges for their shares. During the time you are restricted from selling your shares, you are at risk of forfeiting your shares if you terminate employment and the company has the right to repurchase the shares they gave you.  Once the shares vest, you will recognize ordinary income tax on the full value of the shares and must pay the taxes before the shares are delivered to you.

Once you have obtained the full rights to the restricted shares you hold, there are typically conditions that must be met before you can sell them. You must have held the shares for at least one year. You may be limited in the amount of stock you can sell within a certain period of time – generally you cannot sell more than one percent of the outstanding shares of the stock during a 90-day period.  In addition, the company granting the stock must be current on all of their SEC filings and you must complete and file appropriate documentation before selling the shares.

In order to be cleared for sale, you must also obtain consent from the company who granted the restricted shares to you. When you have met all of these conditions, the bank or financial institution that handles the stock for the issuing corporation – called a transfer agent – can clear your shares for sale. The transfer agent will remove a “legend” that appears on your shares identifying them as restricted. This will allow you to sell the shares in a routine transaction on the open market, usually using a brokerage firm.

There are many complexities to holding restricted stock, but there are obvious benefits as well. If you hold this type of security, or have recently been granted shares as part of an employee compensation package, talk with your financial consultant about how to handle them.  If you would like to receive the publication, Managing the Wealth you’ve Accumulated in One Security, by A.G. Edwards & Sons, Inc., please contact financial consultant, Shelley Phillips-Mills in Bangor at 800-947-5456.

This article provided by A.G. Edwards & Sons, Inc. Member SIPC.


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