H NCEO 2001 Global Equity Compensation Forum Global Employee Stock Purchase Plan Issues for New or...

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NCEO 2001 Global Equity Compensation Forum

Global Employee Stock Purchase Plan Issues for New or Future Plans

Lorraine E. Cohen, San Francisco

November 5, 2001

2© 2001 Arthur Andersen All rights reserved.

Agenda

• What’s happening in the world today?

• What should be considered when developing an ESPP?

• Country specific examples


What’s Happening in the World Today

• The number of companies operating some form of global share plan continues to grow



• The number of companies operating broad based global share plans is also increasing



The prevalence of discounted share purchase plans:


Reason companies offer broad based global share plans

Per 2001 Andersen Survey

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Incentivizeemployees

Encourage shareownership

Tax efficientremuneration

Recruitment andretention

Match competitivepractice

Generate corporateidentity

NorthAmerica

ContinentalEurope

UK


What should be considered when developing an ESPP?

• Plan Design

• General Implementation Issues

• Mobile Employee Considerations

• The Importance of Internal Consensus

• Tax Considerations

• Financial and Accounting Considerations

• Legal and Regulatory Considerations


Plan Design

• One worldwide plan?

• One U.S. plan and one international plan?

• Use of subplans


Plan Design (Continued)

• Are there any minimum service requirements?

• What is the accumulation period?

• What are the relevant grant dates?

• What is the discount on the purchase?

• What are the enrollment periods / dates?

• Are there changes to the elections?


General Implementation Issues

• Mechanisms to allow refunds of employee contributions (e.g., if leave, move country)?

• Pay interest on amounts held prior to stock purchase (may be required by law in some locations)?

• Exchange rate protect employee?


General Implementation Issues (Continued)

• Require stock holding period?– Retention feature (e.g., suspend participation if employee sells prematurely)

– Ensure favorable tax treatment (e.g., in France)

• Paper vs.. electronic enrollment (written

signature may be required in some locations)?

• Local translations in some locations?– May vary by region (e.g., French, Flemish in Belgium)


• Development of tax planning opportunities– Avoidance of double taxation

• Administration with respect to internationally mobile employees– Recordkeeping is key for compliance with local withholding and reporting

obligations

• Policy for sourcing deductions:– Who do we charge for what?

– How do we track it?

Mobile Employee Considerations


The Importance of Internal Consensus

• All company groups must be involved in the decision making process

• Establish working group of HR, Treasury, Legal, Tax, Accounting, and Payroll

• Schedule regular meetings/conference calls to address progress

• Set up regional geographic champions

• While making design and implementation decisions, it is essential that senior management approve decisions as they are being made


• Employee taxation– Timing (tax on match may depend on dividend/voting rights)

– Types of taxes imposed (crisis taxes, communal taxes, surtaxes)

– Evaluation of NET pay impact

• Employer taxation – Types of tax imposed (fringe benefit taxes, social taxes, payroll taxes)

– Deductibility of company match

Tax Considerations

• Caution: Tax rates vary around the world.

• Example: The employer social tax rates in Sweden are about 33% uncapped!


• Corporate reporting and withholding– Timing of remittances to authorities

– Annual reporting specific to stock awards separate from regular compensation?

• Optimization of tax benefits for employee and employer– Mitigation of social taxes

– Deferral of taxation / capital gains tax treatment for employees

Tax Considerations (Continued)


• Is it a non-compensatory plan under Generally Accepted Accounting Principles (GAAP)?– General U.S. GAAP allows up to a 15% discount before the Plan is

considered compensatory (APB 25)

– New accounting standard allow for only a 5% discount (FAS 123)

– Since most companies are still able to report under original standards, plans with up to a 15% discount are noncompensatory and do not report compensation expense related to such plans

• Local country GAAP?

• Who bears cost for company match?

• Timing for re-charges for company match?

Financial and Accounting Considerations


• Securities Law – Prospectus requirements

• Company Law– Fundamental legality of plan

Legal and Regulatory Considerations

• Caution: Some issues can have consequences other than financial, depending on the country.

• Case in point: Failure to file forms reporting option benefits in Singapore is a misdemeanor and the directors may be subject to fines and/or imprisonment.


• Exchange Control Restrictions– Registration of plan with authorities

– Limitations on transfer of funds to purchase stock

– Implications for corporate recharges

• Employment Law– Data protection --Acquired rights

– Works councils --Legality of payroll deductions

– Discrimination issues

Legal and Regulatory Considerations (Continued)

• Caution: In some countries, it is illegal to discriminate against part-time workers

• Example: In Germany, this discrimination is considered indirect sexual discrimination, as part-time jobs are usually held by women. Therefore, part-time employees must be allowed to participate in the ESPP.


Summary of issues considered in broad based global share plans

Per 2001 Andersen Survey

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Tax issues

Legal issues

Local cultural issues

Local businesspractices

NorthAmerica

ContinentalEurope

UK


Country Specific Examples

• United Kingdom

• France


• Securities Law– The Companies Act 1985 and the Financial Services Act 1986 (“FSA”)

generally permit a company (including a non-UK company) to offer shares to its, or its subsidiaries’, employees

– 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

• Exchange Control– None

• Tax– Possible to implement tax-favored arrangement:

• All Employee Share Ownership Plan (AESOP)• Savings Related Share Option (SAYE) Plan

United Kingdom - Overview


United Kingdom - Tax-Qualified PlanAll-Employee Share Ownership Plan (1)

• Operates by way of an employee trust

• Highly tax efficient for employees– Allows employees to contribute on pre-tax basis

– If shares held in trust for five years no tax at all when shares given to employees

– Tax efficiency extends to company match

• Highly tax efficient for company– Employer entitled to deduction based on gross salary

– No National Insurance (11.9%) on shares held in trust for 5 years

• However, contribution limits may require “spill over” into non-qualified plan


United Kingdom - Tax-Qualified PlanAll-Employee Share Ownership Plan (2)

• Main Features – Partnership shares

• Employees may allocate up to 10% of pre-tax salary up to a maximum of £125 per month (£1,500 per year) to buy partnership shares

– Matching shares• Employer may provide up to 2 matching shares for each partnership share

purchased by the employee

– Free shares• Employer may provide up to £3,000 per year of free shares to employees

• Shares must be held in a UK resident trust

• Employees are entitled to dividends while shares in trust

• Employees rights to vote on shares in trust can be restricted


United Kingdom - Tax-Qualified PlanSavings Related Share Option Plan (1)

• Operates by way of a savings contract with a bank/building society

• Not possible to replicate company match

• Tax efficient for employees– No tax at the time of purchase of the shares

• Tax efficient for company– Employer entitled to deduction for the costs of setting up the plan

– No National Insurance payable on shares transferred to employee

• However, contribution limits may require “spill over” into non-qualified plan


United Kingdom - Tax-Qualified PlanSavings Related Share Option Plan (2)

• Main Features– Option is 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 can save between £5 and £250 every month

– Interest received on the savings is tax-free

– Options normally lapse on leaving employment (other than in compassionate circumstances)


• 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”)

– If a Plan d’Epargne d’Entreprise implemented, the bank will conduct the necessary securities filings

• Exchange Control– None

• Tax– Possible to implement a tax-favored arrangement (Plan d’Epargne

d’Entreprise)

– However, contribution limits may require “spill over” into non-qualified plan

France - Overview


France - Tax-Qualified PlanPlan d’Epargne d’Entreprise

• Main Features – Collective employee savings plan designed to encourage creation of a share

portfolio in common with other employees

– Plan must be offered to all employees (although minimum service requirement of up to 6 months can be required)

– Employees can contribute up to 25% of annual gross salaries on an after-tax basis

– Employer can match up to three times (with a ceiling of FF15,000 per annum) the employee’s savings (“abondement”)

– Employer match is free of income tax and social security to participants provided not withdrawn within 5 years. However, it is subject to the C.S.G. and the C.R.D.S surtaxes on 95% of the contribution

H NCEO 2001 Global Equity Compensation Forum Global Employee Stock Purchase Plan Issues for New or...

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