Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable until certain conditions have been met. Upon satisfaction of those conditions, the stock becomes transferable by the person holding the award.
One type of restricted stock is a form of compensation granted by a company. Typically, the conditions that allow the shares to be transferred are continued employment during a period of time, upon which they vest. However, those restrictions can also be some sort of performance condition, such as the company reaching earnings per share goals or financial targets. Restricted stock is becoming a more prominent form of employee compensation, particularly to executives. It has come to prominence as stock options have fallen out of favor after the perceived excesses of the stock market in the early 21st century.
Restricted stock awards are also coming into favor for executives because the income tax consequences can be more favorable to employees than stock options. For example, in the US the consequences of a restricted stock award may be managed by the election under section 83(b) of the Internal Revenue Code, and in some cases the award can be structured to allow for the deferral of all tax until the time of the sale of the stock, and for all appreciation to be taxed at capital gains rates, even if the stock appreciated prior to vesting. In contrast, stock options can result in ordinary income to the recipient when exercised, especially when the stock has appreciated prior to vesting, with only the post-exercise appreciation deferred to the time of sale at capital gains rates.