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VIDEO: Railroaders' Essential Guide to Performance Share Units (PSUs)

Video Financial Planning Taxes

Transcript:

The Railroad's just granted you a bunch of performance share units. Now it's up to you to go out and earn it and capitalize it and build some serious wealth. My name's John McNamara with Highball Advisors and watch this video, as I explain PSUs to you.

Welcome everyone to the Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors and today we're going to talk about performance share units, otherwise known as PSUs, another form of equity compensation, that the Railroad grants to certain Railroaders, to perform certain... They want certain performance metrics added. So let's get right into the basics of it. And I'll walk you through this.

So these are different, in that in other options, a lot of them are related to time, right? Oh, if you are here a year, you'll get a certain traunch of options. If you're another year, you get another traunch. These are linked to performance, right? Do X, Y, and Z. If these things happen, you'll get a grant of options, right? So they grant them to you. So if you hit those performance metrics, they'll vest, right?

So what's unique about these, is the investors and shareholders really like these, right? In that, instead of like I said, just giving it because hey, you stuck around for another year, here's some more money, they're saying, "Well, we'll compensate you but you got to really carry your weight," so to speak. So there's greater upside potential in that, so you can really hit a home run if you hit the metrics, that's for sure.

And instead of the time periods that I talked about, they'll have what are called performance periods. So they're usually three years in length and over those three years, they want you to hit certain metrics, to get the payout or the grant of options, so they can vest, right? And the payouts can vary. They could be anywhere from 50% of the grant to a hundred percent of the grant to 200% of the grant. So when you see that 200% number, wow, that can have significant impact on your net worth.

So let's walk through a example on a PSU grant, right? So we have a year 2020 PSU grant by a fictional Railroad of some kind. So they'll break it down into two performance metrics that they want to see you hit.

The first one will be 50% of the grant, will be based on the three year average return of invested capital by the Railroad, right? That's kind of an internal number and they'll tell you what that is. And it's important that you also understand what that number is because you want to know if you can hit it, right? And the second part of the performance of the share unit grant of the performance metric, is total shareholder return, versus other Railroads right? And that will be 50% of the grant, right? How's your Railroad doing against other Railroads? So that's the two parts of the grant, and just in this example.

So let's go the first part. So the first part, you can get 50% of the 50%, or 100% of the 50% or 200%. And so here's just an example. So let's just say, if you're 70 basis points underneath the target on the return of invested capital, you'll get 50% of the options on this performance metric. But if you hit the retarget on the return of invested capital, you'll get 100%. And if you're, let's say in this case, 40 basis points over the target, you'll get 200%. So you can see the real benefit here. And then likewise on the total shareholder return, same thing, versus other Railroad. If you're the top dog Railroad here, you can get 200% return, right? If your total shareholder return is the best measured against all the other Class 1 Railroads.

So that's the real bang of the performance share units, right there is hitting these metrics, because at the end of the day, even though they're giving you a 200%, you're like, oh, the Railroad's giving me 200... Railroad would love to pay you 200%, because that means they're all doing well, right? Win-win I guess is the term that you want to think about here. But if you don't meet any of these targets, okay, it's all zero. It's all zero and that's not good. So it's really linked to that performance.

So let's say you've performed well and the grant is going to vest. You're going to get some sort of share. So let's just walk through quickly the taxes on the PSUs, right? So it's taxable income. So that's federal state local, right? And then you've got your Railroad Retirement taxes that you have to pay, Tier 1, Tier 2. So that's all taxable. And when do you have to pay that? That's when it's delivered or vesting, right? You're going to have to make that. That's ordinary income. That's got to be paid.

Now normally what will happen is the Railroad will do a withholding for you so that they have the taxes covered for you. So that's very helpful. And then from a tax preparation standpoint, that's form 8949 on Schedule D. You fill out all that and you can work with your accountant or your CPA to fill that stuff out.

So this is just kind of the basic overview of performance share units. What is important to know also from a planning perspective, is if you leave the Railroad, let's say you have another opportunity, these will go away, right? Usually they won't let you exercise them or any of that because you're still in the performance period. So if you have another opportunity to leave the Railroad, really check where you are in that performance cycle, especially the first one that is kind of tough to define. So get those metrics from your Railroad to understand where you are, to understand, hey, I'm thinking of leaving, but what am I leaving on the table? So that's very important because these can be a big piece of your net worth.

If you're terminated from the Railroad, I guess maybe through a PSR or something like that, they could still expire. Sometimes, maybe they'll work something out. That depends upon each of the Railroads. So that's one of the other things you really want to learn from a planning is on the expiration of these, in case you leave the Railroad.

So I hope you found this very interesting, helpful on PSUs. A lot of upside potential, really linked to performance there. So a lot of opportunities there to build that net worth. So please reach out to me. As always, I have a great boarding for Railroad Retirement process that you might want to go through. It's really helpful to help a lot of my clients to go through it, to understand where you are in Railroad Retirement.

So click on the link to start that process. As always, please subscribe to my YouTube channel. The channel's growing. Share it with your colleagues. Getting a lot of great comments. I appreciate that. In the meantime everyone, please stay safe, stay on track and take care. So long everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.