what are stock awards: Complete Guide

Stock awards

Quick answer: If you’ve asked "what are stock awards" this article explains in plain terms the equity-based pay employers grant to align staff and shareholder interests. It covers common forms (restricted stock awards, restricted stock units, performance awards, options, SARs/phantom stock and ESPPs), vesting, taxes in the U.S., accounting, plan governance, and practical planning steps for recipients.

Why this guide matters

Employees increasingly receive equity as part of total compensation. Understanding "what are stock awards" helps you evaluate job offers, manage concentration risk, plan taxes, and know what to expect at termination or a corporate sale. This guide is aimed at beginners and includes clear examples, checklist items, and a resources section to dig deeper.

As of 2026-01-01, according to regulatory guidance and industry materials, stock awards remain a widespread element of U.S. employee compensation and corporate retention packages.

Types of stock awards

Multiple legal and economic forms exist. Below are the principal types employers use and how they differ. Asking "what are stock awards" often means differentiating among these so you know the rights, tax timing, and liquidity implications.

Restricted Stock Awards (RSAs)

• Definition: RSAs are actual company shares issued to you at grant, but subject to restrictions (vesting schedule, forfeiture rules, transfer limits). They are often held in escrow or subject to a repurchase right until vesting conditions are met.
• Ownership and rights: With RSAs you typically have legal ownership and voting rights from grant date, although restrictions limit transferability.
• Vesting mechanics: Time-based (e.g., four-year graded vesting or a one-year cliff) or performance-based. If you leave before vesting, unvested shares are usually forfeited or repurchased at grant price.
• Example: Employer grants 1,000 RSAs. After satisfying time-based vesting, restrictions lapse and you own the shares free of repurchase rights.

Restricted Stock Units (RSUs)

• Definition: RSUs are a promise to deliver shares (or sometimes cash) at settlement once vesting conditions are met; no shares are issued at grant.
• Differences from RSAs: No issued shares at grant, usually no voting rights until settlement, and tax recognition typically occurs on settlement/delivery rather than grant or vest.
• Settlement methods: Full-share delivery, net-share settlement (company withholds shares for taxes), sell-to-cover (broker sells some shares to satisfy tax withholding) or cash settlement.
• Common features: RSUs are popular at public companies because they avoid issuing stock upfront and simplify repurchase complexities.

Performance Stock Awards (PSAs) and Performance Stock Units (PSUs)

• Definition: Performance awards vest or settle only if specified corporate or personal goals are met (revenue targets, EBITDA, TSR, stock price hurdles, or individual performance metrics).
• Target vs actual payout: Awards often have a target number of shares/units and pay out on a scale (e.g., 0%–200%) depending on actual performance.
• Certification: Company must certify results and attainment before vesting/delivery.

Stock Options (ISOs and NSOs/NSQs)

• Definition: Options give the right to purchase company shares at a fixed strike/exercise price for a specified term.
• ISO vs NSO: Incentive stock options (ISOs) have favorable tax rules for employees if holding-period tests are met but are limited to employees and subject to alternative minimum tax (AMT) considerations. Nonqualified stock options (NSOs/NSQs) generate ordinary income on the spread at exercise for tax withholding.
• Exercise mechanics: You exercise (pay the strike price) to acquire shares; some plans permit cashless or broker-assisted exercises.
• Vesting and term: Options typically vest over time and expire after a set term (often 10 years from grant). Post-termination exercise windows vary by reason for termination.

Stock Appreciation Rights (SARs) and Phantom Stock

• SARs: Provide the right to receive the appreciation in share value from grant to exercise, payable in cash or shares—no cash purchase required.
• Phantom stock: A cash or share-denominated award that mirrors share value and dividends without issuing actual equity. Useful for private companies to provide equity-like economics.

Employee Stock Purchase Plans (ESPPs)

• Overview: ESPPs let employees buy company shares, typically at a discount (subject to plan limits), through payroll deductions. While not a "stock award" in the strictest sense, ESPPs are common in equity compensation programs and provide discounted access to equity.

Granting and vesting mechanics

Understanding grant mechanics is critical when asking "what are stock awards"—the grant agreement spells out the rules.

• Grant date: The date the company approves the award and the terms are communicated. The grant date determines valuation baseline for many accounting and tax treatments.
• Grant agreement: The legal contract describing type, number, vesting, exercise price (if any), settlement method, and termination provisions.
• Vesting schedules: Time-based (graded or cliff), performance-based, or hybrid. Graded means portions vest over time; cliff means nothing vests until the cliff date.
• Forfeiture and termination: Most plans prohibit vesting after resignation or termination for cause; some provide limited acceleration for retirement, disability, death, or defined severance events.

Settlement, delivery and liquidity

• Settlement methods: Shares vs cash. Public companies usually settle in shares; private companies may settle in cash or defer settlement until IPO or liquidity event.
• Tax withholding practices: Companies may withhold shares (net share), sell to cover, or require employees to remit cash for taxes upon settlement or exercise.
• Brokerage and deposit: After settlement, shares are usually deposited into a brokerage account. Many companies provide equity award accounts at a designated broker; when referencing exchanges or brokerages, consider integrating with Bitget Wallet or Bitget services for secure custody and trading support.
• Blackout periods: Trading restrictions may apply around earnings releases or other sensitive windows; insider trading rules must be followed.
• Liquidity for private companies: Private-company award holders often face long waits for liquidity—company events (IPO, acquisition) or secondary sales provide opportunities.

Taxation (U.S. focus) and elections

Tax treatment answers a core part of "what are stock awards," because tax timing affects cash flow and planning.

• RSAs: Typically taxed as ordinary income on the fair market value of vested shares when restrictions lapse. Employees may file an 83(b) election within 30 days of grant to be taxed at grant value (potentially lower) and start capital gains holding periods earlier. The 83(b) election is time-limited and irreversible, so careful consideration is needed.
• RSUs: Usually taxed as ordinary income at settlement when shares are delivered (or cash equivalent). Employer must withhold income and payroll taxes at that time.
• NSOs/NSQs: At exercise, the spread between FMV and exercise price is ordinary income subject to withholding; subsequent sale results in capital gain or loss measured from exercise price.
• ISOs: No ordinary income at exercise if statutory rules are met, but the spread may trigger AMT. Favorable capital gains if shares are held at least two years from grant and one year from exercise.
• SARs/Phantom stock: Usually taxed as ordinary income upon settlement and subject to withholding.
• ESPPs: Qualified ESPP plans may provide favorable tax treatment if holding-period requirements are met; otherwise, discount at purchase may be ordinary income.

Important: Employer withholding obligations vary by award type. Some companies automatically sell shares to satisfy taxes at settlement (sell-to-cover). Discuss withholding methods with HR or your equity administrator.

The 83(b) election — what it is and tradeoffs

• What it does: By filing an 83(b) election within 30 days of an RSA grant (or other applicable property transfer), you elect to include the fair market value of the restricted property in income at grant rather than at vesting.
• Benefits: If grant value is low, paying tax early can reduce eventual tax and start the capital gains clock sooner.
• Risks: If you later forfeit unvested shares, taxes paid after an 83(b) election are generally not refunded. Also, you must pay tax with limited liquidity if the award is illiquid.
• Practical step: Consult a tax advisor before filing an 83(b). Deadlines are strict and failure to timely file invalidates the election.

Accounting and corporate reporting

From an employer perspective, stock awards create compensation expense recognized over the vesting period.

• Measurement: Under U.S. GAAP (ASC 718) and IFRS (IFRS 2), companies generally measure the fair value of awards at grant date and expense that value over the requisite service period.
• Expense recognition: Time-based awards are expensed ratably; performance-based awards are expensed when performance conditions are probable of being met (with estimation updates as needed).
• Disclosure: Companies must disclose share-based compensation expense, assumptions used in valuation (volatility, term, discount rates), and the impact on diluted shares.

Legal, plan governance and securities compliance

• Plan documents: Stock plans and grant agreements govern eligibility, limits, and tax withholding.
• Committee approvals: Board or compensation committees typically authorize grants and oversee plan administration.
• Securities law: Public companies must comply with SEC rules; private companies may rely on exemptions (e.g., Rule 701) when issuing awards to employees.
• Insider trading and blackout windows: Award recipients who are insiders must follow company policies and securities laws; trading windows typically follow public information cycles.

What happens on employment termination and corporate events

• Resignation vs termination for cause: Unvested awards are commonly forfeited on resignation or firing for cause; vested awards may be subject to post-termination exercise windows (options) or immediate settlement rules (RSUs/RSAs).
• Retirement, disability, death: Many plans have special provisions—accelerated vesting, extended exercise windows, or immediate settlement may apply.
• Change in control and M&A: Companies often include change-in-control clauses—possible outcomes are acceleration, assumption by acquirer, or cash-out at a negotiated price. Always read your grant agreement for specific protections.

Pros and cons for employees and employers

Employees:

• Pros: Upside participation in company growth, alignment with shareholders, potential tax advantages (ISOs), and retention incentives.
• Cons: Tax complexity, concentration risk in employer stock, limited liquidity for private-company awards, and potential forfeiture on termination.

Employers:

• Pros: Incentivizes performance and retention, aligns employee and shareholder interests, can conserve cash.
• Cons: Dilution to existing shareholders, accounting expense, and administrative burden for plan operation.

Planning considerations and best practices for recipients

When asking "what are stock awards" you should also ask how to manage them. Practical steps:

• Read the grant agreement and plan documents carefully—know vesting, termination rules, and settlement methods.
• Know tax timing and withholding: estimate cash needed for tax events and check whether your employer uses sell-to-cover or net-share settlement.
• Consider diversification: avoid excessive concentration in employer stock; plan sales around blackout windows and tax strategy.
• Evaluate an 83(b) election early (if eligible) with professional advice.
• Understand post-termination exercise windows for options and have liquidity plans.
• For private-company awards, document potential liquidity paths (IPO, acquisition, or secondary markets) and restrictions on transfer.
• Consult a tax advisor or financial planner for complex situations (large grants, ISOs with AMT exposure, multi-state tax issues).

Call to action: If you manage equity awards alongside other digital assets, consider secure custody and tax-tracking tools—Bitget Wallet can help centralize holdings and provide account security for traded shares where compatible.

Examples and sample calculations

Below are simplified, illustrative examples to show mechanics and tax timing. These are for explanation only and not tax advice.

Example 1 — RSU vesting and tax withholding:

• Grant: 500 RSUs
• Vesting: 25% per year over 4 years (125 shares/year)
• On first vest date, share FMV = $40
• Ordinary income recognized: 125 * $40 = $5,000 (subject to withholding)
• Employer withholds shares to cover tax: if withholding rate results in 20 shares sold, you receive 105 shares delivered.

Example 2 — NSO exercise and sale (simplified):

• Grant: 1,000 NSOs, strike $10
• Exercise date FMV: $30
• Exercise spread taxable as ordinary income: (30 - 10) * 1,000 = $20,000
• Subsequent sale at $50: capital gain on post-exercise appreciation = (50 - 30) * 1,000 = $20,000 taxed as short- or long-term depending on holding period from exercise.

Example 3 — 83(b) election for an RSA:

• Grant: 2,000 RSAs when FMV = $1/share
• If you file 83(b), include $2,000 as ordinary income immediately; future appreciation taxed as capital gain from grant date. If you wait until vesting (FMV later $10), taxable ordinary income would have been $20,000.
• Tradeoff: 83(b) reduces future tax if shares appreciate, but you bear risk of paying tax on shares that may be forfeited.

Frequently asked questions (FAQ)

Q: Can I vote restricted shares? A: With RSAs you generally have voting rights from grant. With RSUs you typically do not have voting rights until settlement; some plans provide dividend equivalents prior to settlement.

Q: What is the 83(b) deadline? A: You must file an 83(b) election with the IRS within 30 days of the date of property transfer. Missing the deadline generally means you cannot elect early taxation.

Q: How are awards taxed if the company is private? A: Tax rules (timing) still apply based on when you recognize income (vesting, exercise, settlement). However, liquidity to pay taxes may be limited. Employers may offer tax-withholding solutions or delay settlement until liquidity events.

Q: What is sell-to-cover? A: Sell-to-cover is a method where your broker sells enough shares at settlement to cover withholding taxes, delivering the net shares to you.

Q: If I leave the company, do I lose my awards? A: It depends on vesting and plan rules. Unvested awards are typically forfeited; vested awards may be retained subject to post-termination windows and other plan provisions.

Glossary of key terms

• Vesting: The process by which you earn rights to shares/units over time or upon performance.
• Cliff: A vesting schedule where no awards vest until a specified date.
• Grant date: The date the company grants the award and terms are set.
• Exercise price / strike price: The price to buy underlying shares under an option.
• Spread: Difference between FMV at exercise and strike price.
• FMV: Fair market value of a share at a given time.
• 83(b): An IRS election to include the fair market value of restricted property in income at grant.
• Withholding: Employer required withholding of taxes at income recognition events.
• Dilution: Increase in outstanding shares that reduces existing shareholders’ ownership percentage.

References and further reading

Sources used to compile this guide include regulatory guidance and educational materials from recognized authorities and financial firms. Suggested sources for deeper reading (search for these organizations and their equity compensation guidance):

• FINRA — employee-focused guidance on stock awards
• Morgan Stanley — education on restricted and performance stock awards and taxes
• Fidelity — guidance on restricted stock awards
• Charles Schwab — equity award education (RSUs/RSAs and performance awards)
• National Center for Employee Ownership (NCEO) — overview of stock options, restricted stock, phantom stock, SARs, ESPPs
• Investopedia — stock compensation overview and restricted stock articles
• Industry tax guidance — IRS rules on stock compensation and 83(b) elections

External resources and compliance notes

• For plan-specific questions consult your company’s stock plan documents and the plan administrator.
• For tax questions, consult a qualified tax advisor; this guide does not constitute tax or legal advice.
• When managing awarded shares and account custody, consider secure solutions such as Bitget Wallet for digital asset custody and integrated account management where appropriate.

Final notes and next steps

Understanding "what are stock awards" is the first step toward managing equity compensation effectively. Start by locating your grant agreement and plan documents, note key deadlines (such as the 83(b) window), and model the tax and liquidity implications of typical vesting events. For personalized planning, consult tax and financial advisors.

If you want, next steps can include a worksheet to model specific scenarios (RSU vesting schedules, option exercises, and 83(b) impact). Explore Bitget Wallet and Bitget’s educational resources for secure account management alongside your broader compensation plan.

Last updated: 2026-01-01. Sources: FINRA, Morgan Stanley, Fidelity, Charles Schwab, NCEO, Investopedia.