One of the most significant, and often confusing, elements of an employee’s benefits package is equity compensation. For Wells Fargo employees, this comes in the form of restricted share rights (RSRs). Between understanding what they are and how they are taxed, RSRs can quickly complicate your financial plan. If your head is swimming, you’re not alone.
At Calamita Wealth Management, many of our clients are Wells Fargo employees with equity compensation packages, and we’ve found that many of them have the same questions about their RSRs. In this guide, we hope to demystify the Wells Fargo restricted share rights (RSRs) so you can make informed decisions about your long-term financial future.
1.) What are RSRs?
Restricted share rights (RSRs) are a type of equity compensation that is subject to a vesting schedule. At Wells Fargo, the terms RSRs and restricted stock units (RSUs) are often used interchangeably and do not necessarily refer to two different types of equity compensation.
With the Wells Fargo restricted share rights plan, the company grants shares of company stock to employees. The grant is “restricted” because it is subject to a vesting schedule and other conditions reflected in your Award Agreement. This often has connections to the length of employment or based on performance goals. There are also various other limits on transfers or sales that Wells Fargo places on this type of equity compensation.
The number of shares of RSRs that a Wells Fargo employee receives is based on the employee’s Total Variable Compensation (TVC) award along with a companywide cash/stock grid that determines the amount of TVC awarded in stock (RSRs). Here’s an example. If Wells Fargo grants you 1,000 long-term restricted share rights (RSRs) when the market price of its stock is $55, and by the time the grant vests, the stock price has fallen to $40, the grant is then worth $40,000 to you before taxes.
Once an RSR has become fully vested, it’s converted to stock and you can either sell it or keep it. RSRs are not taxable when they are first granted, but they are taxable once fully vested (see question #7 below).
2.) Why does Wells Fargo grant restricted shared rights (RSRs)?
Equity compensation is commonly in use to reward and retain employees by granting them a stake in the company. RSRs essentially tie your earnings to your company’s success, meaning you are more likely to act in a way that helps your company succeed.
RSRs are also used to retain employees due to the vesting schedules. Employees with unvested RSRs will be more likely to stay with the company—at least until their shares vest.
At Wells Fargo, RSRs are granted under the Wells Fargo & Company Long-Term Incentive Compensation Plan. This plan is reviewed annually to make sure it’s providing value to the employees as well as Wells Fargo.
3.) What are the advantages of RSRs?
One of the biggest advantages of RSRs is that they allow employees to share in the profits and success of the company. You spend so much of your time at work that it can be a great mental benefit to know that you are reaping what you sow.
As the company’s share price goes up, your compensation goes up, and once the shares have vested and all other restrictions have been lifted, you are free to sell the shares and spend the cash or reinvest it as you’d like.
The taxes on RSRs are also a lot more straightforward than other equity compensation like stock options.
4.) What are the disadvantages of RSRs?
The downside to RSRs is that they are not immediate compensation. You may have worked 40 hours this week, but a portion of your compensation is deferred until your RSRs vest.
Additionally, your ultimate compensation level is tied to the performance of the company. If the share price goes down, your RSRs go down and your compensation goes down. It can be stressful not knowing exactly how much you can count on from RSRs.
Lastly, employees will have to pay taxes on the value of the RSR once it vests. Employees are tied to the vesting schedule and the value of the stock at that time; there is no way to defer or time the taxes due as there is with other stock options.
5.) How do RSRs differ from stock options?
In the past, Wells Fargo issued stock options as part of its long-term incentive compensation. However, it has since moved away from issuing stock options and has focused primarily on issuing RSRs. Despite this, the terminologies are often still used interchangeably by Wells Fargo employees, so it may be helpful to understand the difference.
With RSRs, you are taxed when you receive the shares. Your taxable income is the market value of the shares at vesting. This is a potentially valuable equity award that typically carries less risk than a stock option.
Unlike stock options, which can go “underwater” and lose all practical value with a falling stock price, RSRs are almost always worth something, even if the stock price drops dramatically. This can make RSRs an appealing form of equity compensation since there is little to no risk to employees.
6.) What should I do with my Wells Fargo restricted share rights (RSRs)?
With no opportunity for preferential capital gains tax treatment from holding the stock for a year after it has vested, there is nothing to stop you from selling some or all the Wells Fargo shares upon vesting if you so desire.
So, should you retain the shares or sell some or all of them? Like most financial questions, the answer will depend on your unique situation.
Once vested, the RSRs are just like any other shares of company stock. You should consider all other shares of company stock held in your taxable and retirement accounts as well as the number of future shares that may vest. If Wells Fargo stock has been a steady performer for you, you may be tempted to hold the stock—after all, there was no cost to obtain the shares.
However, another way to look at this: A decision to hold the shares upon vesting is a decision to buy a company’s stock at the price on that day. If the shares have greatly appreciated, this is like buying at the top of the market and hoping that the shares continue to appreciate.
As a general rule of thumb, I don’t like to hold more than 1-3% of a person’s investable assets in a single stock because this often produces additional risk without substantial enough reward. Also, as an employee of Wells Fargo, you inherently already have a lot of eggs in one basket since they also pay your salary. It is often better to diversify than continue to amass an overly concentrated position.
7.) How are RSRs taxed?
With RSRs, you are taxed when the shares are delivered, which is almost always at vesting. Your taxable income is the market value of the shares at vesting. Wells Fargo typically withholds the tax due on the vested shares by selling an applicable number of shares to equal the tax due. Keep in mind, the tax due on the initial vesting of shares is based on your ordinary income tax rate, not your long-term capital gains tax rate.
However, if you do not sell the stock at vesting but rather at a later date, any difference between the sale price and the fair market value on the date of vesting is reported as a capital gain or loss.
As an example, assume the closing price on the vesting date was $50.00 per share. If you held 1,000 RSRs vesting, it would result in $50,000 of taxable income (1,000 x $50.00). This is regardless of whether you immediately sold the shares or not.
If you decide to hold on to the shares, then any future gain or loss above or below $50 would be taxed at your applicable short-term or long-term capital gains tax rate.
8.) What taxes will you owe on RSRs?
- Federal income tax
- State income tax (if applicable in your state)
- Social Security tax
- Medicare tax
These are the taxes you will owe on the fair market value of your shares on the date your RSRs vest.
9.) What happens when you sell the shares of your stock?
Since income tax was likely already paid at the time your shares vested, selling your Wells Fargo stock will be treated the same as selling shares of any other stock. There will be a profit or loss based on the sale price minus the fair market value on the date the RSR fully vested.
If the sale results in a gain, you will be taxed at either short-term or long-term capital gains rates depending on how long you held the stock from the date of vesting. If you hold onto it for less than one year, the short-term capital gains rate will apply, whereas the long-term rate will apply if you were holding onto it for longer than one year.
10.) Do you pay taxes on growth?
You will only pay tax on growth at the time of sale. If your stock grows substantially after vesting but you don’t sell, no taxes will be due.
Growth at the time of sale will be taxed as either short-term or long-term capital gains, depending on how long you held the stock before selling (see question #9).
11.) Do RSRs show up on a W-2?
RSRs will show up as taxable wages on your W-2 in the year that they vest.
12.) How are taxes withheld from RSRs?
There are several ways taxes can be withheld from RSRs. In some cases, you can elect that your employer withholds taxes from your paycheck in the year of vesting. But with Wells Fargo RSRs, tax is automatically satisfied. This is by withholding shares based on the number of shares equal to the total tax due.
13.) Do restricted share rights have a vesting period?
Yes, RSRs have a vesting period. For Wells Fargo employees, this usually has ties to performance benchmarks or length of service. Your Award Agreement should outline the details of your specific vesting schedule.
14.) What is a vesting schedule?
A portion of RSRs awarded will vest according to the vesting schedule and the net shares (after withholding of any taxes) of Wells Fargo & Company common stock will be deposited into a retained share account in your name at Computershare. However, you are free to transfer them out of Computershare to a brokerage account of your choice and sell them if you’d like.
Except for retirement and certain other limited circumstances (e.g., death or disability), if you terminate employment prior to your vesting date, you will likely forfeit your shares. You can refer to your specific Award Agreement for the additional terms and conditions you must meet for your award to vest.
15.) How do I calculate the cost basis for RSRs?
The cost basis for an RSR is the fair market value of the stock on the date it became fully vested. The custodian in charge of holding your stock will have this information on file, usually in your online account. For Wells Fargo employees, the default custodian for your shares is Computershare unless you have transferred your stock to another brokerage account.
16.) Can you sell Wells Fargo restricted share rights (RSRs) at any time?
In most cases, you can sell your stock as soon as they vest. In certain circumstances, there may be a blackout period to prevent insider trading. If this is the case for you, it should be clearly outlined in your Award Agreement or other documentation provided by Wells Fargo.
17.) Should you sell RSRs immediately?
Deciding to sell your RSRs immediately will depend on your unique financial situation. It also depends on the value of the stock at the time of vesting. If the stock has appreciated significantly since the RSR was granted, then selling immediately can be equated to selling at the market “high.” If, on the other hand, the share price recently fell and there is good reason to believe it will grow in the future, holding on to the stock may be a better bet.
You should also consider any financial goals that may be achieved by selling the stock. The overall position in your portfolio is another important point. If you are already overly concentrated, selling the stock to reinvest in a more diversified position can be an effective strategy.
18.) Can you lose money with an Wells Fargo restricted share rights (RSRs)?
It is possible to lose money on an RSR if the underlying stock loses value after it vests. Even if you were to sell it, though, it’s still worth something to you since it cost nothing for you to purchase. This is especially true if taxes were paid by selling shares (as is usually the case for Wells Fargo employees).
If you paid taxes out of pocket and the stock price fell below the amount paid in taxes, then the RSR would result in a loss.
19.) What happens to RSRs when you quit your job?
Any unvested RSRs will be forfeited if you quit your job. Any fully vested RSRs will be yours to keep even if you leave the company.
Still Have Questions about Wells Fargo restricted share rights (RSRs)?
RSRs are a complicated form of equity compensation and it’s common to have questions. Are you are a Wells Fargo employee with restricted share rights (RSRs) in your compensation package? We can help you navigate these questions and more. Want an in-depth look at the role RSRs play in your financial plan? Schedule an introductory phone call using our online calendar. You can even each out to us at (704) 276-7325 or firstname.lastname@example.org.
About Calamita Wealth Management
Todd Calamita is the founder and managing principal of Calamita Wealth Management. Calamita Wealth is an independent, fee-only wealth management company located in Charlotte, NC, serving people locally and across the country. It focuses on providing wealth management solutions to affluent individuals over age 50 and their families. He has had more than 20 years of experience in the financial services industry. He is passionate about helping people have a better life. Todd does this by designing and implementing customized financial plans that bring clarity and confidence.
Todd is a CERTIFIED FINANCIAL PLANNER™ and CERTIFIED DIVORCE FINANCIAL ANALYST® professional. He holds a Bachelor of Business Administration from Ohio University. Todd also holds a Master of Business Administration from the Weatherhead School of Management at Case Western Reserve University. He has authored a book, Plan Smart: Conquering 10 Common Money Traps. Todd has also written numerous articles on wide-ranging personal finance topics, from taxes to retirement accounts. He was a feature in a Financial Boot Camp TV series! His role is a volunteer showing people how to make smart decisions with their money.