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Among mid-career professionals in Korea, when a friend has just moved to a new company, there is one question that always surfaces at the first meet-up. The first one is asking what kind of company it is. Is it an old company? A conglomerate? A new one? What business is it in?
If the company is young, in a new industry, or connected to foreign capital, a second question follows.
"Did you get RSUs (Restricted Stock Units)?"
Only a few years ago, the term RSU was unfamiliar — unfamiliar enough that at first hearing, you might not have even known it had anything to do with compensation.
Today, among professionals, it has become the ultimate destination of compensation, and for some, the entire reason for switching jobs.
When Koreans talked about equity compensation, they usually thought of stock options. From the mid-1990s onward, stock options — already mainstream overseas — spread in Korea on the back of the so-called "venture boom." For cash-poor startups and companies whose value lay in the future, stock options offered the maximum compensation upside for top talent without requiring cash. But the real power of stock options comes not from the company's intrinsic assets, but from diluting shareholders' wealth and control (in the case of new-share issuance). For that reason, a tight web of institutional safeguards exists, including special shareholder-meeting resolutions.
Even so, the attractiveness of stock options as a form of equity reward is high, and many startups that initially leaned on stock options as their primary retention tool kept running similar programs after going public. As a result, the trend of stock option use among listed Korean companies has been steadily climbing.
RSUs, by contrast, come with relatively few institutional constraints. Unlike stock options, where issuance, grant, and tax treatment are all spelled out in law, RSUs are much more flexible.
Part of this is because RSUs are a more recent concept, but the bigger reason is this: stock options, when issued as new shares, can have an effect similar to a "discounted rights offering" and therefore infringe on shareholder interests, whereas RSUs are typically delivered from previously bought-back treasury shares — or as equivalent cash compensation — and so do not directly infringe on shareholder interests.
The rising trend in RSUs is visible in the disclosures around treasury share disposals and the reasons given for those disposals. Among the sharply increasing treasury share disposal cases of the past two years, more than half are for employee performance compensation — i.e., RSUs.
From the 2010s onward, equity compensation usage in the U.S. has clearly been shifting from stock options to RSUs. That is different from Korea, where both stock options and RSUs are rising together.
In the U.S., roughly 70% or more of executive total compensation is long-term incentives tied to the stock price, and a substantial portion of those long-term incentives is delivered as stock options. Stock options were originally a compensation tool recommended for aligning executives' wealth with shareholders'. But through a string of crises — the massive Enron accounting fraud, the subprime mortgage meltdown — it became clear that executives who should have been held accountable were instead realizing huge stock option gains. Public frustration mounted, and against that backdrop, the Sarbanes-Oxley Act emerged to address accounting fraud.
Before that law, stock options were showing a reality that ran in exactly the opposite direction from their stated purpose of maximizing shareholder value. Many executives, aiming to maximize their exercise gains, freely used tactics like backdating (retroactively moving the grant reference date to when the share price was lower), spring loading (deliberately scheduling positive disclosures just before exercise windows), and bullet dodging (deliberately scheduling negative disclosures just before grant dates). Backdating alone produced abnormal excess compensation of around $1.5 million on average for executives at more than 130 companies. Subsequently, under Sarbanes-Oxley, the SEC pursued a broad wave of lawsuits against companies, and more than 50 executives resigned as a result.
As negative perceptions of stock options grew, ordinary shareholders' desire to rein in executive excesses grew with them. This gave rise to the "Say on Pay" provisions of the Dodd-Frank Act, which institutionalized shareholder voting to approve executive compensation.
To pass those Say on Pay votes, companies needed a more moderate alternative to stock options that was still tied to shareholder value — and, from that point on, RSUs have been the alternative, continuing to gain ground.
The starting point was different. Unlike the U.S., where stock options were already generalized, Korean conglomerates have had a hard time running stock option programs: ownership and management are not fully separated, the ownership structures of multiple affiliates are complex, and there are equity concerns across affiliates. On top of that, for already-listed conglomerates, the potential for explosive stock price growth is limited.
So for the conglomerates that lead reward trends, stock options were never a particularly popular tool.
For cash-poor venture companies and startups, however, stock options were a great substitute. Combined with institutional benefits, they gradually expanded their footprint. IT and platform industries, biotech, and batteries — areas where Korean startups built their presence — finally began to flower in the market, and as stock option rewards in these companies produced so-called "jackpots," conglomerates moved to secure competitive compensation at the executive level, while already-listed startups wanted something more stable that still preserved upside potential in a new market. Both turned to RSUs, which were also, by that point, the dominant form of long-term executive compensation in the U.S.
For the employees receiving them, stock options become worthless pieces of paper if the stock price does not rise above the exercise price, whereas RSUs guarantee at least the value of the current stock price at the time of grant. They are relatively more stable while still letting the recipient enjoy upside if the stock appreciates. This combination of autonomy, convenience, stability, and differentiated reward potential is exactly why RSUs have spread so widely.
In short, Korea has not yet experienced the downside of equity compensation that the U.S. went through directly. We have absorbed RSUs as-is, as an alternative,
and as a result we lack the experiential knowledge of what to gain from equity compensation — and what to be careful of. As an HR practitioner designing equity compensation, what should we watch out for?
First: the stock price itself is not really the reward. The ultimate reward is the difference between the stock price at the time of grant and the stock price at the time of exercise (or payout).
Because of this, the main beneficiaries of stock options — executives and officers — find it easier to drive down the near-term stock price at the time of grant than to push it up at some far-off exercise date, and the temptation to deliberately damage corporate value can therefore run strong. RSUs do not offer the steep upside curve that stock options do, but if they are structured to fix the grant value and then calculate the number of shares that corresponds to it (rather than fixing the number of shares), it becomes possible, similarly, to receive more shares by driving down the stock price at the time of grant.
Performance-linked equity compensation is one way to address this — it varies the number of shares granted based on performance leading up to the grant date.
With this design, any deliberate efforts to drive down the stock price just before the grant would also hurt the performance metrics, ultimately reducing the number of shares the executive would receive. That helps deter deliberate shareholder-value destruction by executives and officers.
Second: long-term incentives should ultimately contribute to the retention of top talent.
Recently-listed companies, riding hot interest in their new industries, have produced many "stock option jackpot" stories for their core employees. The problem is that the follow-up stories to these pieces are always about waves of those same core employees leaving. The equity compensation has become a vehicle for "early retirement," brought even earlier.
Many new companies issue stock options broadly as a reward tool, and they use Korea's venture company stock option exceptions to keep the exercise price at par value — maximizing exercise gains at the point of IPO. That ends up putting excessive gains into the hands of executives and employees relative to the company's actual value, and those recipients then tend to mass-sell their exercised shares and leave. That is both a large loss in value for the company and a massive dilution of the stock.
To prevent such post-exercise mass selling, overseas companies use Stock Ownership Plans.
Core executives and employees are required to hold a certain portion of the company's stock, treating mass stock sales by executives as an act of prejudice against the company and maintaining ancillary means of holding them in check. Even when granting stock through stock options or RSUs, a more carefully designed program would encourage recipients to hold at least a portion for longer periods — so that the long-term growth of company value and employee compensation continues hand in hand.