Everything You Need to Know About the Microsoft Stock Vesting Schedule
Microsoft employees are granted Restricted Stock Units (RSUs) as part of their compensation package, and they also have access to an Employee Stock Purchase Plan (ESPP) through their company benefits. In this article, you’ll learn how these plans work, along with vesting schedules and purchase periods.
Restricted Stock Units (RSUs)
As a Microsoft employee, much of your compensation will come as stock awards. These awards are granted at different times and for various reasons–you’ll find a complete breakdown of stock distribution timing at Microsoft in the next section. But no matter when you get stock awards, they’ll arrive in the form of restricted stock units (RSUs).
Before you can put together a plan for your RSUs, it’s crucial to understand what they are. Put simply, RSUs are a secondary form of compensation that allows companies to give their employees shares in the company they work for. In most cases, workers are given RSUs at a point in time known as the “grant date,” but they don’t vest until a later date (AKA the “vesting date”).
You won’t hold ownership of the positions included in your RSUs or their underlying value until the vesting date. When your shares do vest, they’ll be delivered to your predetermined brokerage account (Morgan Stanley or Fidelity, in the case of Microsoft), and you’ll gain control over their associated positions. You’ll also be taxed on the shares’ value as earned income. The earned income calculation is solved by taking the stock price at vest (not at grant) multiplied by the number of shares vested.
Example, you are granted 1,000 shares on 01/01/2021 when the stock is trading at $300 per share, with a 4-year vesting period of 25% per year. At the time of grant, this total grant is worth $300,000. At the time of grant, no compensation is recognized.
On 01/01/2022, 250 of 25% of your shares will vest, and the stock is trading at $330 per share. This total vest is valued at $82,500, all of which will be classified as earned income.
Note that your cost basis (your purchase price) is also set on the date of vest. So if you sell you shares at $325, you’ll have a $5 per share loss. If you sell at $335, you’ll have a $5 gain, etc.
Hypothetically, let’s say on 01/01/2023, the stock is trading at $250 per share. Your vest of 250 shares will result in $62,500 of earned income on that date.
Many employers have a default sell-to-cover election to withhold a certain percentage of shares for income taxes. The default at Microsoft is 22%. So if you have 100 shares vest, 22 will be automatically sold and sent in for Federal taxes (plus roughly another 8% for Social Security and Medicare), resulting in roughly 70 shares being deposited in your brokerage account.
When Are RSUs Received?
There are essentially three different categories of Microsoft RSUs you’ll need to be aware of, as defined by their associated grant dates. These categories are:
On-hire stock awards. These awards are granted to new employees as part of their offer to join Microsoft. As mentioned above, on-hire stock awards typically vest 25% per year starting 1 year after your start date.
Annual stock awards. Microsoft employees are eligible for additional stock awards every August as a result of their performance review. These awards typically vest 20% per year, starting 1 quarter after grant. Your first vest should be on November 30th if your grant date is August 31.
Special stock awards. The first two categories cover Microsoft’s “standard” stock award distribution, but they don’t include all the RSUs granted to Microsoft workers. The company also offers special stock awards (SSA) and leadership stock awards (LSA) to employees in management positions and people who go above and beyond.
Employee Stock Purchase Plan
Microsoft offers an employee stock purchase plan (ESPP) as part of their benefits package.
Under Microsoft’s ESPP, you’ll have the option of contributing up to 15% of your salary and cash bonus to buy Microsoft stock. The funds you put into this program are used to purchase shares at the end of each quarter (called an offering period), and these shares come at a 10% discount from their fair market value. While this program is based on payroll deductions, similarly to 401(k) contributions, the funds you pay into it are contributed on an after-tax basis.
The IRS caps annual contributions to these types of plans (called Section 423 plans) at $25,000 per calendar year. If you enroll at 15% and that results in more than $25k annually, you’ll receive a refund for the overcontribution as Microsoft will cap these contributions for you.
If you want to learn more about the ESPP and the specifics, see another article here: How to Maximize your Microsoft ESPP
What is The Stock Vesting Schedule?
You’ll likely receive a new Microsoft stock grant on a yearly basis, if not more. Here’s a quick explanation of the most common vesting schedules that you’ll find:
On-hire stock awards normally vest on a four-year schedule at a rate of 25% per year. You can expect the first vest to fall on your first anniversary and the remaining vests to follow annually on that date.
Annual stock awards vest over the course of five years at a rate of 20% per year. Unlike on-hire stock awards, these awards vest every quarter. Annual stock awards are typically granted in August of each year after your performance review. However, sometimes you will receive a mid year grant in March if you get promoted during mid year reviews. If you have trouble remembering when these vest, consider setting yourself a series of reminders in Outlook. You can start the first one on 8/31 and recur quarterly after that.
Special stock awards don’t follow a standard schedule for distribution, and the same is true for vesting. You’ll need to handle these awards on a case-by-case basis.
Leverage Your Stock Awards
You are probably familiar with stock awards by this point in your career, but every company issues them differently, has different policies on stock refreshers, and even has different vesting schedules.
If you’re looking for straightforward advice on how to view your stock compensation in the context of your greater financial planning goals, reach out to Consilio Wealth Advisors.
The team at Consilio specializes in financial planning for current and former tech industry employees–including people working at Microsoft. That means we can provide the expert advice you need on RSUs, ESPPs, and 401(k) planning. If you’re interested in leveraging your stock options for full benefit, schedule an appointment today.
Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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