Compensation Basics for Nvidia Employees

Nvidia compensates its employees through salary, restricted stock units and cash bonuses. In the absence of tax planning, all three are taxed at ordinary income tax rates.

Restricted Stock Units

Nvidia provides its employees with stock awards by way of restricted stock units (NSUs), which come in three forms:

• Initial NSU grant

• Annual stock refresher

• Out-of-cycle bonus

Initial RSU Grants

Initial RSU grants are negotiated during the hiring process. Nvidia recently moved from an evenly distributed amount of RSUs in each of the four vesting years to a front-loaded 40%/30%/20%/10% yearly vesting schedule. The first 40% vests on the grant-date anniversary, with the remaining yearly percentages vesting quarterly. The total number of shares in the stock award is the target amount divided by the 30-day average closing price for Nvidia just prior to grant date (typically the 6th business day of the month following the employee’s start date.)

For example, a new employee starting work in December 2021 with an on-hire restricted stock unit grant of $250,000 would have received $250,000/$29, or 8,621 RSUs in early January 2022. On the first anniversary of the grant date, the employee would have received 3,448 shares. Each quarter thereafter, the employee would see 25% of his yearly allocated percentage of total RSUs vest.

While vested amounts are front-loaded, stock-price acceleration can smooth the value received. For example, here’s how the dollar value of the Nvidia RSU grant described above would have played out:

Stock Refreshers

Annual restricted stock unit refreshers are typically issued starting an employee’s second calendar year for high performance. The units vest quarterly over 4 years.

Performance Stock Units

Nvidia grants Performance Stock Units (PSUs), that vest based on performance metrics, not time with the company (as is the case with RSUs). These goals include company financial performance, stock performance, or strategic objectives, and usually 1 to 3 years. Depending on how well the objectives are met, 0-200% of target shares are awarded.

Taxation of RSUs and PSUs

RSUs and PSUs are taxed as ordinary income upon vesting and as a capital gain or loss upon the sale of the shares received. To learn about RSU tax mistakes and how to avoid them, watch our video on RSU taxation.

Tax Withholding on RSUs

When RSUs and PSUs vest, Nvidia sells a portion of the resulting shares to cover payroll taxes (social security, medicare, etc.) and withhold income taxes for the IRS and the employee’s state of residence. For those making less than $1 million dollars in annual supplemental wages, the withholding rate is typically 22% of the market value of the shares. However, this is often not sufficient to cover the employee’s tax liability to the IRS. It’s often the case that the employee must pay penalties in addition to the taxes not covered by withholding.

Employee Stock Purchase Plan

Employee stock purchase plans offer an opportunity to purchase company shares with after-tax dollars at a discount. At Nvidia, that discount is 15% off the lower of the offering price (the closing price on the first trading day after the month you enroll) or the closing price on the lot trading day of that purchase period. The employee stock purchase plan remains in effect for 2 years, and is split into 4 purchasing periods. Best of all, an employee’s offering price remains the same for the entire 2 years!

For example, a new employee starting work in December 2021 and immediately opting into the plan would have received an offing price of $30.06/share (the closing price on January 3, 2022.). At the end of the first offering period, the stock price was ~$14.50, so the employee would have received his shares at a 15% discount to $14.50, or $12.33/share.

While the employee stock purchase plan does increase single-stock concentration risk in your overall portfolio, this risk can be managed allowing you to reap the discount (ie free money) benefit. With the right plan in place, we highly recommend exercising this benefit.