Stocks, Restricted and Unrestricted

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Stocks, Restricted and Unrestricted


Restricted and unrestricted stocks are important components of corporate executive compensation packages. Restricted stocks have particular conditions that must be fulfilled before they can be transferred or sold, whereas unrestricted stocks have no such conditions.

There are two types of restricted stocks. The first type is often referred to as unregistered stocks, which are not legally registered with the Securities and Exchange Commission (SEC) for the purpose of public transactions. The Federal Securities Act of 1933 requires that all stocks be registered with the SEC prior to any public transaction unless the transaction or the stocks are exempt. In 1972 the SEC implemented Rule 144, which identified restricted stocks as any privately issued company stocks, or company stocks publicly purchased by company insiders (powerful employees like company executives). According to the SEC, restricted stocks must be held for a certain period of time before they can be publicly sold. However, restricted stocks may be sold privately at any time, though such transactions are strictly regulated.

Restricted stocks are commonly used in executive compensation packages to ensure a balance of long- and short-term incentive rewards. Whereas unrestricted stocks are often considered to be short-term incentive rewards because they can be immediately sold, restricted stocks are usually considered to be long-term incentives given the length of their vesting periods (the length of time the stocks must be legally held before they can be publicly sold). However, there is disagreement about the actual effectiveness of restricted stocks as long-term incentives. Restricted stocks are also often granted to insiders after corporate mergers and acquisitions to prevent adverse effects on company performance. Venture capitalists are also often given restricted stocks in pre-initial public offerings to help ensure long-term commitment.

The second type of restricted stock is also commonly used in company compensation plans as incentives or rewards for employee performance or service. These stocks are similar to unrestricted stocks in the sense that they are not legally restricted. However, they are restricted in the sense that they cannot be transferred or sold by employees until they have fulfilled certain conditions set by the company. These conditions are often related to specific employee performance goals or are satisfied after an employee remains with a company for a set period of time. For example, a company may grant one thousand shares of restricted stock to an employee who can sell those shares when a certain performance goal is fulfilled. Alternatively, it may grant one thousand shares of restricted stock to an employee who can sell those shares two years after the date the shares were issued.

Although both restricted and unrestricted stocks have long played a role in executive compensation packages, the popularity of restricted stocks increased dramatically in the United States after the passing of the 2002 Sarbanes-Oxley Act, which required companies to expense stock options granted to all employees through compensation plans. The act followed a wave of corporate scandals between 1999 and 2001 in which prominent company executives at companies like Enron, WorldCom, Tyco, and Adelphia artificially inflated their companys stock prices to cash in their stock options for their own financial gain.



Besner, Gregory. 2004. Restricted Stock: Regulations, Trends and Technologies. Compensation and Benefits Review 36 (1):5259.

Ellig, Bruce R. 2006. The Evolution of Executive Pay in the United States. Compensation and Benefits Review 38 (2):5561.

Longnecker, Brent M., and Christopher S. Crawford. 2006. The Power of Restricted Stock. Updated ed. Scottsdale, AZ:WorldatWork.

Jayson J. Funke