h
Global Executive Share Plans
Rachel E. Lie
October 29, 2001
© 2001 Arthur Andersen All rights reserved.
Agenda
•
Global share plan benchmarks and case study
•
Considerations in implementing global share plans
•
Thinking strategically about your global plans (Fit-Cost-Value)
© 2001 Arthur Andersen All rights reserved.
Global share plan survey senior employee plan objectives
• In North America, 84% of companies use plans to encourage
ownership and align interests of employees with shareholders
23 %
G e n e ra te co rpo ra te id e n tity
42 %
47 %
13 %
S u p p o rt cu ltura l ch a ng e
10 %
6%
71 %
M a tch co m p e titive pra ctice
32 %
82 %
81 %
R e cru itm e n t a n d re te n tion o f skille d
e m p lo ye e s
Im p ro ve p e rcep tio n o f e q u a lity a cro ss
b o rd e rs
50 %
65 %
10 %
8%
12 %
26 %
D e live r ta x e fficie nt rem u n e ra tio n
10 %
29 %
84 %
E n co u ra g e sha re o w n e rsh ip a n d a lig n
in te re sts o f e m p lo ye e s w ith sh are h o lde rs
50 %
26 %
35 %
In ce n tivize e m p lo ye e s to a ch ie ve
a p p ro pria te pe rform a n ce ta rge ts
0%
© 2001 Arthur Andersen All rights reserved.
73 %
63 %
10%
20%
30%
40%
N o rth A m e rica
50%
60%
70%
C o n tin e n ta l E u ro p e
80%
UK
90%
100%
Global share plan survey types of plans used
• The vast majority of plans cover the grant of market value
options, particularly in North America
S e n io r e m p lo ye e p la n s
100%
M a rk e t va lu e o p tio n p la n
79%
83%
3%
N il p rice o r d isco u n te d o p tio n p la n
17%
12%
13%
D isco u n te d sh a re p u rch a se p la n
9%
11%
52%
F re e /re stricte d sh a re p la n
10%
61%
0%
10%
20%
30%
40%
50%
60%
70%
80%
% o f p la n s in o p e ra tio n
© 2001 Arthur Andersen All rights reserved.
N o rth A m e ric a
C o n tin e n ta l E u ro p e
UK
90%
100%
Case study
•
Company has 125,000 employees in 46 countries
•
Company extends 5 plans worldwide:
–
–
–
–
–
Broad-based stock option plan
Employee stock purchase plan
Executive stock option plan
Executive deferred compensation plan
Executive bonus plan
© 2001 Arthur Andersen All rights reserved.
Case study - purposes for the plans
•
Broad based stock option plan - “Group Hug”
•
Employee stock purchase plan - employee ownership
•
Executive bonus plan - incentive and employee ownership
•
Executive stock option plan - incentive, retention, and employee
ownership
•
Executive deferred compensation plan - retention and
employee ownership
© 2001 Arthur Andersen All rights reserved.
Case study - executive bonus plan
•
Bonuses are based on individual and corporate performance
during each calendar year. Payments are made in lump-sums
in the following calendar year.
•
Eligible executives have share ownership guidelines. The
more senior the executives, the greater the number of shares
they are asked to own.
•
To ensure executives meet their share ownership guidelines, the
company pays 75% in cash with the remaining 25% paid out in
company shares. The number of shares issued is based on the
stock's closing market price on the date the bonus is
determined.
•
© 2001 Arthur Andersen All rights reserved.
Case study - executive bonus plan
•
Example: Executive is entitled to a bonus of $100,000. On
December 31st, the stock is trading at $125 per share. The
executive will receive a gross cash award, payable by his or her
local employer of $75,000. He or she will also receive 200
shares of stock ($100,000 x 25% / $125/share = 200 shares).
© 2001 Arthur Andersen All rights reserved.
Case study - executive bonus plan
•
Germany
– Where employees receive 25% of the bonus in shares, the company must
provide the share equivalent on the date the bonus is paid regardless of
the share value on the date the bonus was determined.
Example: Executive is entitled to a bonus of $100,000. On December 31st, the stock
closed at $125/share. On the date of payment, the stock closed at $100/share.
The executive will receive a gross cash award, payable by his or her local employer
of $75,000. He or she will also receive 250 shares of stock ($100,000 x 25% /
$100/share = 250 shares).
– The company is liable for any declines in the share price between the
date the bonus is determined and the date the shares are delivered.
– In principle the employer should not be liable for an increase in share
price since there should be no damage to the employee.
© 2001 Arthur Andersen All rights reserved.
Case study - executive bonus plan
•
Italy
– The company does not have to protect the employee against a decline in
share price as long as the plan agreement is clear that it does not provide
any guaranteed benefit in that regard.
•
Australia
– In New South Wales and Queensland, employment legislation include
“unfair contracts” provisions. In order to minimize the risk of a court or
tribunal ruling that an employee share plan operates unfairly, it is
important to ensure that employees participating in the plan clearly
understand the terms of the scheme and the consequences of their
participation in the plan, including any tax and other financial liabilities.
© 2001 Arthur Andersen All rights reserved.
Case study - executive bonus plan
•
Canada
– If: (i) Ontario resident executives’ participation in trades under the plan
are voluntary (ii) ….; and (iii) …, there is no requirement to register the
plan or prepare a prospectus for the plan in Ontario.
– Where a company has share ownership guidelines, it will be extremely
difficult for such company to make use of the exemption from dealer
registration and prospectus filing requirements.
– The company may be able to rely on the Executive Exemption if Ontario
executives are given the choice of whether or not to have a portion of their
bonuses paid in shares. It is essential that the Plan be structured
such that Ontario Executives are permitted to freely choose whether
or not their bonuses will include share components.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Compensation Eligible for
Deferral
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•
Base salary (up to 50%)
•
Payments made under the
Executive Bonus Plan (EBP)
•
Discretionary bonuses
•
Restricted stock units (RSUs)
Case study - executive deferred compensation plan
•
Timing of election to defer base
salary
•
December 15th of year prior to
the year in which the salary
would otherwise be payable
•
Timing of election to defer EBP
awards, discretionary bonuses,
and RSUs
•
September 30 of the year prior
to the year in which the EBP
award and/or discretionary
bonus would otherwise be
payable and the RSUs are
scheduled to vest
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Custody of deferred amounts
•
The funds are set aside in a
Rabbi trust. The amounts
deferred are at risk of forfeiture
should the company become
insolvent
•
Form of distribution
•
Deferred RSUs are paid in
common stock; deferred cash
amounts are paid in cash.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Argentina
– Deferred amounts are taxable when deposited in the employee’s account.
– Any matching contributions will be taxable once the amounts have been
deposited into the employee’s account.
– Since dividends are credited to an employee’s account at the time they
are earned, they become taxable at that time.
– Interest income becomes taxable when the amounts are deposited in the
employee’s account.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Brazil
– If the funds are not credited to the employee’s account in the employee’s
name, the deferred amounts are not taxable. Funds allocated to the
employee’s account are considered available to the employee and the
amount is considered taxable income.
– Matching contributions are not taxed until payment is made to the
executive.
– If the funds are deposited in a non-Brazilian bank account taxation will
occur only when the investment earnings are distributed to the individual.
– If the funds are deposited in a Brazilian Bank, and the account is in the
name of the company, earnings will be treated as company income.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Canada
– Income tax is triggered when the individual has a binding legal right to
receipt of the amount, whether or not receipt was deferred - generally the
year in which the deferred amount is credited to the employee’s account.
– The only opportunity to defer income tax under this plan is with the
deferred RSUs. Deferred RSUs fall outside the restrictive rules for “salary
deferral arrangements.”
– Certain exceptions may apply for new Canadian residents and certain
bonus deferrals. Canadian tax law does permit bonus deferrals where the
plan meets certain statutory requirements. One requirement is that
payment can not occur more than three years after the end of the
calendar year in which the services were rendered.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Germany
– Only discretionary payments that are deferred and subject to forfeiture on
early withdrawal would be eligible for a tax deferral. Discretionary
payments are payments that have not been earned and can not be
determined at the time the election to defer the income is made.
– If an amount can be determined based on past experience, the amount
may not be discretionary. For example, if an employer pays up to 10% of
base salary if certain profitability goals are met and those goals have
been met for several consecutive years, the bonus may not be considered
discretionary.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Singapore
– The salary will be subject to tax in the year that it is earned, and the
taxable amount will include the amount of deferral.
– The discretionary bonus will be subject to tax in the year it is originally
payable to the employee, and the taxable amount will include the amount
of deferral.
– The RSU will be subject to tax in the year when it is vested to the
employee, and the taxable amount will be the market value of the shares
on the date of vesting.
© 2001 Arthur Andersen All rights reserved.
Case study - executive deferred compensation plan
•
Company decision: do not extend to foreign employees.
•
But what about US expatriates?
© 2001 Arthur Andersen All rights reserved.
Considerations in implementing a stock plan
• Tax and legal issues play a significant part in companies’
decisions to implement plans overseas
S e n io r e m p lo ye e p la n s
39%
L o ca l b u sin e ss p ra ctice s
33%
36%
26%
L o ca l cu ltu ra l issu e s
8%
29%
96%
L e g a l issu e s
80%
93%
96%
T a x issu e s
83%
86%
0%
© 2001 Arthur Andersen All rights reserved.
10%
20%
30%
40%
N o rth A m e ric a
50%
60%
C o n tin e n ta l E u ro p e
70%
UK
80%
90%
100%
France - securities law
•
The public offer of shares by a company to more than 100 participants
requires the prior approval of the Commission des Opérations de
Bourse (“COB”). It is possible to obtain a waiver.
•
If the plan is qualified for French tax purposes, no prospectus or
approval is required if more than 100 participants are involved.
•
The purchase and sale of shares in a non-French company quoted on
the French stock exchange must be handled by a bank registered in
France which acts as an approved intermediary.
© 2001 Arthur Andersen All rights reserved.
France - stock option taxation
•
Non-Qualified Plan:
– Spread element subject to income tax (top marginal rate is 53.25%) + C.S.G and
C.R.D.S. surtaxes + employer and employee social security contributions at the time
of exercise
– Capital gain realized on sale: 26%, provided total proceeds for year exceed FF 50,000
•
Qualified Plan:
– No requirement for approval from French Tax Administration
– No income tax until time of sale of underlying shares
– No social charges or surtaxes payable on exercise gain by employer or employee
provided shares are not sold prior to expiry of statutory holding period
– New legislation enacted on May 2, 2001 reduced statutory holding period from 5 years
from grant to 4 years (applied retroactively for options granted on or after April 27,
2000)
– In addition, under the new law, if a further two year holding period between exercise
and sale is respected, additional tax benefits are available to employees
© 2001 Arthur Andersen All rights reserved.
France - stock option taxation
C o m p a ris on o f th e p re vio us an d c u rren t ta x-q u a lified
re g im e :
H o ld in g P e rio d
T a xa tio n o f th e
e xe rcise g ain if
h o ldin g p erio d n ot
met
T a xa tio n o f o p tion
g a in s if th e h oldin g
p e rio d is m e t
© 2001 Arthur Andersen All rights reserved.
P re vio u s R u le s
N e w R u le s
5 Y e a rs
4 Y e a rs
In co m e ta x + C S G /C R D S + e m p lo ye rs an d e m p lo ye e so cia l
se cu rity rate s
 E xe rcise g ain
re alize d o n th e
e xe rcise : 4 0 % (fo r
o p tio n s g ra n te d
a fte r S e p te m b e r 2 0 ,
1995)
 C a p ital g ain
re alize d o n
sa le : 2 6 % , p ro vid e d
to tal p ro ce e d s for
ye a r e xce e d F F
5 0 ,0 0 0
E xe rcise g ain re alize d o n th e
e xe rcise :
 < F F 1 M illio n a n d sold b e fore 2
ye a rs a fter e xe rcise : 4 0 %
 < F F 1 M illio n a n d sold 2 ye ars o r
m o re a fte r e xe rcise (i.e ., 6 ye a rs
fro m th e d a te o f gra n t): 2 6 % o n
th e a m o u n t
 > F F 1 M illio n a n d sold b e fore 2
ye a rs a fter e xe rcise : 5 0 %
 > F F 1 M illio n a n d sold 2 ye ars
a fte r e xe rcise : 40 %
C a p ital g ain re alize d on sale : 26 % ,
p ro vid e d to tal pro ce e d s fo r yea r
e xce e d F F 5 0 ,0 0 0
France - stock option taxation
•
Principal conditions for stock options to be treated as tax-qualified are:
– The option price must remain unchanged as of the date of the grant (except in a
few limited circumstances)
– For quoted companies, the option price cannot be lower than 80% of the average
stock exchange price during the 20 stock exchange days preceding the grant
– When the stock option plan provides for the allocation of existing shares which
have been repurchased by the granting company, the option price cannot be lower
than 80% of the average actual repurchase price of its own shares held by the
granting company to be allocated to the participants
– When the plan consists of the issuance of new shares, the total number of options
granted and remaining unexercised (outstanding options) cannot cover a number
of shares exceeding one-third of the granting company’s share capital
© 2001 Arthur Andersen All rights reserved.
France - stock option taxation
•
Principal conditions for stock options to be treated as tax-qualified
(continued):
– Options cannot be granted to participants holding more than 10% of the granting
company’s share capital
– Options can only be granted to employees and/or certain non-employed directors
with management responsibilities
– Options should not be transferable except in the case of death of the option holder
– In the case of death of the option holder, his/her heirs have six months to exercise
outstanding options
© 2001 Arthur Andersen All rights reserved.
Italy - securities law
•
Requirement to file a prospectus unless
– participation only offered to managers or directors (dirigente, as defined under
Italian law), or
– participation not offered to more than 200 individuals, or
– total aggregate value of shares under offer does not exceed Euro 40,000
•
If the number of employees exceeds 200 it is usually necessary to
review the position in more detail, e.g.:
– it is usually possible to avoid issues by offering identical plans to employees in
different subsidiaries
– it is not possible to avoid the issues by offering identical plans to employees in
different business units within the same subsidiary
© 2001 Arthur Andersen All rights reserved.
Italy - stock option taxation
•
Taxable at exercise unless exercise price equals or exceeds “normal
value” at grant
•
If taxable at exercise, taxable amount is the excess of normal value at
exercise over the exercise price
•
“Normal value” is defined under Italian legislation as the average listing
price (e.g., closing price) of the shares, as listed on the stock
exchange, during the month immediately preceding the date of
grant/exercise
© 2001 Arthur Andersen All rights reserved.
Netherlands - securities law
•
Requirement to file a prospectus unless offering made within
“restricted circle” of investors
•
Securities Supervision Act prohibits trading in securities while in
possession of inside information
•
This prohibition is waived if the company notifies the Securities Board
of its intention to grant options or shares two months in advance
© 2001 Arthur Andersen All rights reserved.
Netherlands - stock option taxation
•
Unconditional options are taxed at grant
•
Conditional options are options which are subject to continued
employment or performance conditions being met and are taxed as
follows:
– at vesting on intrinsic value plus “expectation” value, and
– on any post vesting appreciation if exercised within 3 years of grant
•
Employees can make joint election with employer to postpone the
taxable moment until exercise (election needs to be made prior to
vesting)
© 2001 Arthur Andersen All rights reserved.
United Kingdom - securities law
•
The Companies Act 1985 and the Financial Services Act 1986 (“FSA”)
generally permit a company (including a foreign company) to offer
shares to its employees or the employees of its subsidiaries
•
Section 57 FSA prohibits anyone other than an authorized person from
issuing an “investment advertisement” (any invitation to acquire or sell
shares). However, there is a specific exemption for an investment
advertisement issued in connection with an employee share plan
•
For companies listed on the London Stock Exchange, shareholder
approval will be required for implementation of the following:
– employee share plan involving the issue of new shares
– a long term incentive plan in which directors of the issuer can participate
© 2001 Arthur Andersen All rights reserved.
United Kingdom - stock option taxation
•
Taxation treatment depends on whether or not plan is “approved” (i.e.,
qualified for U.K. tax purposes)
•
Unapproved Plan:
– Income and social tax withholding required at exercise
– Withholding operated through the Pay As You Earn system
– Withholding mechanism must ensure income tax is recovered from employee
within 30 days of exercise, otherwise employee will suffer a further tax charge on
the tax payment itself
© 2001 Arthur Andersen All rights reserved.
United Kingdom - stock option taxation
•
National Insurance on spread at 11.9% for employer (uncapped)
•
Possible under recent legislation, if employees agree, for employers to
transfer National Insurance liability to employees
•
Annual reporting of all option transactions (grant, exercise,
assignment, cancellation) no later than 92 days following the end of
the tax year i.e., by July 7 of each year (U.K. tax year runs from April 6
to following April 5)
© 2001 Arthur Andersen All rights reserved.
United Kingdom - stock option taxation
•
Approved Plan
– Plan must be approved by Inland Revenue
– Limit of £30,000 per employee on options held under approved plan at any time
– No tax at exercise if option exercised more than 3 years from grant and more than
3 years from a previous exercise that qualified for tax relief
– No National Insurance on spread irrespective of whether tax-approved exercise
– No withholding required irrespective of when exercised
•
Annual reporting on Form 35 of all option transactions (grant, exercise,
assignment, cancellation) no later than 92 days following the end of
the tax year i.e., by July 7 of each year
© 2001 Arthur Andersen All rights reserved.
United Kingdom - Save As You Earn Plans
Main features
– Option plans coupled with a savings contract (from grant to exercise)
– Options must be offered to all employees on the same terms (although new joiners
can be excluded for up to 5 years)
– Savings contract can run for 3, 5 or 7 years from grant
– Exercise price can be set at a discount of up to 20% of market value of shares at
grant
– Employees enter into regular savings contract with bank or building society and use
funds to pay the exercise price. Between £5 and £250 can be saved every month;
interest received on the savings is tax-free
– Options normally lapse on leaving employment (other than in compassionate
circumstances)
© 2001 Arthur Andersen All rights reserved.
United Kingdom - Save As You Earn Plans
Taxation
– No tax at grant
– No tax charge on the interest on the savings contract
– No tax or National Insurance on exercise, provided the option is exercised in
accordance with contract
© 2001 Arthur Andersen All rights reserved.
Taxation at grant
•
Switzerland
– Taxable amount calculated using Black-Scholes formula
– Can reduce amount subject to tax if a restriction period is applied (6% per
annum up to a maximum of 5 years is applied to FMV of shares before
the Black-Scholes calculation)
– Options with a total term exceeding 10 years will normally be taxed at
exercise
– Options with a restriction period exceeding 5 years will normally be taxed
at exercise
© 2001 Arthur Andersen All rights reserved.
Taxation at grant
•
Belgium
– General valuation method: 15% of value of underlying share at the time of
offer plus 1% for each year or part of a year the option can be exercised
beyond 5 years
– Alternative valuation method: 7.5% of the value of the underlying share at
the time of offer plus .5% for each additional year or part of a year that
option can be exercised beyond 5 years
© 2001 Arthur Andersen All rights reserved.
Taxation at grant
•
Belgium (continued)
– For alternate valuation method the following conditions must be met:
• the option must contain a clause that it may not be exercised before the end
of the third calendar year following the year of offer or after the tenth year
following the year of offer
• the option may not be transferable “inter vivos”
• the beneficiary may not be covered by the grantor or a related company against the
risk of hedging
• the exercise price must be clearly determined at the time of offer
• the option must relate to shares of the employing company or to shares of a
company which has a direct or indirect participation in the employing company
© 2001 Arthur Andersen All rights reserved.
Communication
• Do your executives understand what they’ve got?
Senior Employee Plans
16%
33%
N e w sle tte r
23%
63%
60%
B o o kle t
100%
60%
46%
M e e tin g /P re se n ta tio n
15%
10%
2%
V id e o
8%
60%
38%
E m a il/In tra n e t
77%
0%
10%
20%
30%
40%
N o rth A m e rica
© 2001 Arthur Andersen All rights reserved.
50%
60%
70%
C o n tin en tal E u rop e
80%
90%
UK
100%
Plan Administration
• Do your executives need a personal touch?
S e n io r e m p lo ye e p la n s
58%
In te rn a lly
50%
56%
42%
E xte rn a lly
50%
44%
0%
10%
20%
30%
N o rth A m e ric a
© 2001 Arthur Andersen All rights reserved.
40%
50%
C o n tin e n ta l E u ro p e
60%
UK
70%
80%
Fit-Cost-Value

Determine the extent of the fit between global HR
strategy/programs and the company’s business strategy and
desired corporate culture.

Fit considerations include:
 Evaluating how HR strategies and programs fit with corporate vision,
mission, business strategy, and culture;
 Assessing the degree of differences in languages, cultures, legal and
regulatory environments and workforce demographics across countries;
 Identifying the value the company places on global consistency vs. local
differentiation; and
 Considering the speed and intensity of change in the organization,
industry, and local environment.
© 2001 Arthur Andersen All rights reserved.
Fit-Cost-Value

Calculate the cost of global HR programs, to measure their
return on investment, improve cost effectiveness, and
benchmark using relevant industry practices.

Cost considerations include:
 Determining costs and returns on investment of global HR programs and
benchmark against relevant industry practices;
 Identifying cost data needed; and
 Considering the appropriate balance between cost reduction and
necessary investments to achieve your global business strategy.
© 2001 Arthur Andersen All rights reserved.
Fit-Cost-Value

Assess the value of global HR policies and programs to
employees and the company.

Value considerations include:
 Assessing how employees and the company value global HR policies,
programs, and services;
 Customizing policies and programs by country where appropriate; and
 Determining national and organizational culture differences when
identifying value analysis methods.
© 2001 Arthur Andersen All rights reserved.
Questions?
© 2001 Arthur Andersen All rights reserved.
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