More commonly known as restricted securities or restricted stock, letter stock refers to shares of stock that are not fully transferred to the recipient until specific conditions are met. Stock of this type is often used as part of employee compensation packages, subject to the employee fulfilling all relevant obligations required to receive the shares. In some cases, the letter stock may only be transferred if the company reaches certain performance goals. If this does not happen, the stock remains in the possession of the issuing company.
Letter stock can be in the form of common or preferred shares, depending on how many levels of employees are allowed to participate in the program. Executives are often issued letter stock as part of the employee package, but in recent years, managers and other employees have also begun to receive this type of benefit. When this type of compensation is used as part of a retirement program, there is usually a requirement that the employee become fully vested in the program in order to have access to the shares. For example, the company may require that the employee have five years of continuous employment in order to become fully vested in a stock ownership program. Once this qualification is met, the shares are usually issued to the employee on an annual basis, and held in a special account where the value of the shares accrues interest until the employee reaches retirement.
At that point, the employee can choose to withdraw the entire balance of the account, effectively allowing the company to buy the letter stock back. Alternatively, it is often possible to structure a series of disbursements from the account on a regular basis, creating a steady monthly income for the retiree. When the entire balance is withdrawn, many people will roll the money over into some other type of government recognized plan, and leave the principle in place while receiving payments on the interest earned each month.
Today, it is not unusual for the issuance of letter stock to not only be connected with the employee’s tenure with the company, but also the market performance of the company itself. Should the company experience a year where profits are down significantly, the amount of shares awarded to each eligible employee is adjusted accordingly. During years where the company is more prosperous, a larger number of shares is placed into each employee’s account. This approach has become more common as companies look for ways to maintain a sound financial position even when the general economy is experiencing a downturn.