Question

The Board of Directors has ask you to advise them as to whether it would be better to compensate employees with an additional bonus or restricted stock units (RSUs). They have noted that the Corporate tax rate is expected to decline from 35% to 15% and the Individual tax rates is expected to decline from 40% TO 20%. next year. Advice the Board as to the different tax treatment from both an employer and employee perspective of Bonuses vs RSU’s. What advice would you give them? What additional information might be helpful in making the decision?

Answer 1

The decision of whether to pay the employees additional bonus or issue restricted stock units (RSUs) would depend on the actual situation of the organization and the expected impact of its decision on the organization and its operations. The individual tax rate is not the concern of the organization however, the corporate tax rate is certainly a concern for the organization. Thus, from the point of view of the employer considering that the corporate tax has been reduced from 35% to 15% the employer shall utilize the opportunity to show as much profit as possible as the resultant tax on such profit would be significantly lower. Thus, from the point of view of the employer issuing RSUs will be a better option instead of payment of additional bonus. As a result of this not only the organization would minimize the cost of operations but at the same time will be successful in widening its capital base.

However, from the employees’ point of view they would want as much earning as possible as the reduced individual tax rate from 40% to 20% would also help them to reduce their income tax liability for the year. Thus, the employees would be willing to accept additional bonus from the employer.

However, the following additional information would be helpful in making a better decision in this respect:

1. The cash position of the organization, i.e. whether the employer is in position to pay additional bonus to the employees or not.
2. The level of salary of the employees and worker and what the preference of the employees while it comes to additional bonus and RSUs.