Everyone else is talking about Brexit (the vote in the UK to leave the EU), why should the NASPP Blog be left out of the conversation? For today’s entry, I discuss what Brexit might mean for your stock plans.
Don’t Panic—Yet
The good news is that the vote is advisory, so it isn’t as if the UK has immediately exited the EU. They are still part of the EU for the short-term. The UK government and the EU have to come to an agreement about how the exit plan will work and various experts have indicated that this could take two years or more.
How Will Stock Plans Be Impacted?
By now, we are all too familiar with the EU Directives that impact stock compensation. While the Directives are complicated enough, in and of themselves, if the UK leaves the EU, things could get a lot more complicated. The UK will have it’s own rules that may or may not be the same as the rules in the Directives. A recent alert by Baker & McKenzie summaries a number of areas in which stock compensation offered to employees in the UK could be affected.
Securities Laws: The EU Prospectus Directive (including both the filing requirement and exemptions) will no longer apply in the UK. This could turn out to be better or worse than the way things are now: the UK could require companies offering stock compensation to file a prospectus (probably worse), could provide an exemption for stock plans (probably the same as now for many companies, depending on the requirements for exemption), or could recognize prospectuses filed in the EU (or even in countries outside of the EU, such as the United States) (the same or better).
Data Privacy: The EU Data Privacy Directive would also no longer apply in the UK. The EU has proposed new rules for this directive, so right now, we don’t know what the final rules will be for any countries in the EU, much less the UK. But once the UK has left the EU, they can determine their own rules; maybe these rules would be similar to the rules that the EU adopts, maybe not. One bit of good news is that Baker & McKenzie notes that “It would be surprising … if the UK would not consider consent to be a valid ground to collect, process and transfer personal data.” Since that is how most companies comply with the EU Data Privacy Directive for their stock plans, little may change here.
Discrimination: There are a number of EU Directives that prohibit discrimination against specified groups of employees. Those Directives would also no longer apply in the UK, but the UK would be free to adopt its own rules on discrimination. Baker & McKenzie notes that they do not expect to see substantial changes here.
Social Insurance, Too
An alert by EY notes that Brexit may also impact the social insurance obligations of mobile employees, their employers’ compliance obligations, and the benefits mobile employees are entitled to. Currently, the EU governs how social insurance applies when employees move between countries in the EU. Unless the UK comes to an agreement with the EU that the EU rules still apply to employees moving between the UK and other EU countries, individual agreements would have to be put in place between the EU and all the EU countries. Some of these agreements exist, but they haven’t been updated since the EU established its rules. Many have expired or don’t address how mobility works in today’s world. This could get ugly.
What About Companies that Don’t Have Stock Plan Participants in the UK?
For those companies, there shouldn’t be any direct impact to their stock plans (other than the impact of stock price volatility resulting from the economic uncertainty caused by Brexit). But, if you are a US-based company with a multi-national stock plan, chances are that you have stock plan participants in the UK. In the NASPP/PwC Global Equity Incentives Survey, the UK is second only to the US in terms of countries where respondents have employees and offer stock compensation.
More to Come
I’m sure there will be more implications to think about as the UK’s exit looms closer. At this year’s NASPP Conference, our perennially popular session, “Around the World in 60 Minutes: Key International Updates” will most certainly have a lot to say about Brexit, as will the session “Making Sense of Europe.” Be sure to attend one or both of these sessions so you are up-to-date on how your stock plan participants in the UK will be affected.
This past summer, the NASPP and Solium co-sponsored a quick survey on global stock plan administration. We asked companies about the technological challenges they experience when it comes to administering global stock plans, focusing on 12 primary challenges related to tax compliance, financial reporting, and other administrative matters. Close to 70% of respondents indicated that they struggle with four or more of the challenges identified and several noted that they struggle with nine or more of the challenges.
For today’s blog entry, I highlight five things I learned from the survey:
1. There are still a lot of manual processes out there.
Two-thirds of respondents say they spend too much time on manual processes. This is a high-risk proposition: it is difficult to implement adequate controls over processes and calculations performed in a spreadsheet. This seems especially concerning given that the SEC is in the process of adopting rules requiring recovery of compensation for all material misstatements, even if due to inadvertent error (see “SEC Proposes Clawback Rules,” July 7, 2015). One incorrect calculation discovered too late could result in recoupment of bonuses and other incentive compensation paid to executive officers.
2. Tax compliance is a top concern for companies.
This really isn’t a surprise—let’s face it, tax laws outside the United States are a hot mess. Every country does something different. Some countries change their laws every few years (I’m looking at you, Australia and France) and grandfather in old awards. Some countries have different rules for social insurance taxes vs. income taxes. Add in mobile employees and, well, you have a lot of work for tax lawyers.
3. Regulatory compliance is also a challenge.
56% of respondents cite keeping up with regulatory changes as a top challenge and 45% cite regulatory requirements in other countries. Regulatory compliance goes beyond tax laws to include things like securities laws, data privacy (a hot topic these days, see “Data Privacy Upheaval,” December 3, 2015), labor laws, currency restrictions and a host of other issues. It’s hard to stay on top of it all.
4. It’s the participants that suffer.
Ultimately, in the struggle to administer a global stock plan, something has to give and that something is usually the participant. Only 50% of respondents offer a qualified plan in countries where they could; the hurdle of regulatory compliance gets in the way. And 75% of respondents said that they would focus more on employee education if they could just spend less time on basic administration.
5. Expectations are low.
When we asked companies what is on their wish list for their administrative system, I was surprised at how low some items ranked (it was a “check all that apply” question, I thought everyone would want just about everything). For example, despite the fact that 71% of respondents reported tax-compliance for mobile employees as a top challenge, only 64% wanted a system that could calculate tax liabilities for mobile participants. It left us wondering if companies need to dream bigger for their administrative platforms.
Check out the White Paper and Survey
If you haven’t had a chance to read it yet, check out the white paper on the survey results and download the full results from the Solium website.
We recently posted the executive summary to the NASPP and PwC 2015 Global Equity Incentives Survey and, later today, we will be presenting highlights of the results in our webcast, “Top Trends in Equity Plans for International Employees.” For today’s blog entry, I highlight five findings that I think are significant:
Globalization Continues: Back when we did the 2012 survey, 20% of respondents said they expected to increase global participation in their stock plan and this trend held steady in 2015, with 19% again expecting to increase participation. In addition 77% of respondents said they expect global participation to remain the same. That leaves only a very small percentage of companies that expect to pull back their global stock plans.
Compliance Reviews Are More Routine: The percentage of respondents who said they conduct annual compliance reviews of their global stock plans increased to 43%, up from 34% in 2012. At the same time, respondents conducting only sporadic reviews dropped to 40%, down from 45%. It can be risky to wait until you hear about a regulatory change to conduct a compliance review; annual reviews help ensure that you know when the laws impacting your global stock plan have changed.
UK Takes the Lead in Challenging Tax Compliance: We asked respondents to indicate which countries they found to be challenging in terms of tax compliance. The UK was first, with 46% of the votes, up from 36% (third place) in 2012. China, however, is hanging in there at second place with 42% of the votes (China was in first place in 2012). France dropped to third place, with 26% of the votes (down from second place and 38% of the votes in 2012).
Mobility Compliance Up: The percentage of respondents tracking mobile employees continues to increase: 87% of respondents track formal assignees (up from 80% in 2012), 62% of respondents track mobile employees who aren’t part of an assignee program (up from 60% in 2012), and a surprising 27% track business travelers (up from 18% in 2012). But the tools for tracking mobile employees still leave something to be desired: 36% of respondents track this in an Excel spreadsheet, up from 29% in 2012. About another third (32%) outsource tracking to a consultant or TPA. The final third use a hodge podge of methods.
Participant Understanding Looks Like a Mountain Rather Than a Bell Curve: Only 34% of respondents felt that their global participants understand a good deal or completely understand their stock plan benefits. That leaves a two-thirds majority for whom participant understanding is at best, somewhat or partial. Global stock plans are a very expensive employee benefit, both in terms of the P&L and administrative cost. It seems a little crazy to invest resources like this in a plan and not also invest in the education to make sure participants understand it.
Be sure to tune in to the webcast later today to learn more highlights from the survey.
NASPP: What is the most critical thing NASPP Conference attendees need to know about equity awards held by globally mobile employees?
Stuart: Tax authorities across the globe are becoming more and more sophisticated when it comes to understanding the most common equity vehicles available to globally mobile employees. Significant negative outcomes can occur, including financial statement impact, if the right process is not put in place.
NASPP: What common mistake do companies make and how can they avoid it?
Stuart: A common mistake organizations make when dealing with equity provided to expatriate employees is to forget about the employee once they have come off of assignment. Post-repatriation equity income should be reviewed for any host country tax implications.
NASPP: What is the silver lining to all of this?
Stuart: The equity process for expatriates is manageable and surprises can be avoided.
NASPP: Tell us three things people don’t know about you.
Stuart:
I once appeared on the show “Candid Camera” doing hopscotch on a sidewalk in downtown San Jose. I received $25 for that appearance.
I scuba dived in Tahiti, following a divemaster who was towing 1/2 of a marlin while sharks attacked it.
I played trombone for the UCLA Marching Band and was lucky enough to march in two Rose Bowl Parades and play at the follow on Rose Bowl games.
Speaking Proposals: NASPP Conference speaking proposals are due a week from Friday, by March 1. With the Conference in September, we are on a tight schedule this year and cannot make any exceptions to this deadline, no matter how dire the circumstances. If you feel the flu coming on, plan accordingly.
Early-Bird Registration: For those of you that are not hoping to speak at the Conference, the deadline for early-bird registration ends on Friday, March 8. This deadline also will not be extended. Don’t pay more than you have to for the Conference; register by March 8.
Quick Survey on Globally Mobile Employees Take our quick survey on globally mobile employees. With just eight questions, we’re serious about the “quick” part–you can complete the survey in less than five minutes!
We Have a Winner! Congratulations to Elizabeth Dodge of Stock & Option Solutions! Elizabeth won our raffle for the free registration to the CEP Symposium.
Here’s your NASPP “To Do List” for the week:
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog.
Our 20th Annual Conference is over, and, I’ll admit, I’m still recovering from the buzz. When I say buzz, I mean the literal energy and enthusiasm that seems to vibrate throughout every conference. It was great to engage with so many members, as well as listen in on sessions that are so timely and relevant to the challenges we face today. Having been to a dozen conferences over the years, I’d rank this year’s conference as our best ever. I won’t recap the full conference in today’s blog (you’ll have to wait for our next Advisor edition for that), but I wanted to share my observation on some of the top topics trending in our world of stock compensation based on things seen and overheard.
The Unofficial Top 5
1.Performance Plans and associated Valuation Strategies: Performance plans are migrating from plainer vanilla (I can’t use the term plain vanilla, because I don’t know of a performance plan that was that simple to administer) to more creative approaches (things like the use of relative TSR). In conjunction with new pay for performance models, the relative accounting impact and considerations are worth understanding.
2.Say-on-Pay: As we’ve passed through the peak of the second annual proxy season since the implementation of Say-on-Pay, it’s still a very much a hot topic. With more companies receiving negative Say-on-Pay votes from shareholders in 2012 than 2011, companies are more invested in ensuring their disclosures will withstand shareholder scrutiny.
3.Global Administration and Mobility: Learning to navigate the intricate nuances of managing global and mobile employee populations continues to be top priority for stock plan professionals. Sessions on global administration always rank highly on our conference attendance lists, and this year was no different.
4. Executives, Executives, and Executives: Handling tricky issues and situations relatives to executives and their compensation ranks high on the interest scale. Things like terminations and pay for performance top the list.
5. Stock Ownership Guidelines: I’ve heard many people talking about the rapid trend towards adopting stock ownership guidelines. If you work for an issuer (or a vendor who provides direct support to issuer stock plan administrators) and are asking “what are stock ownership guidelines?”, you’d better find out quick (in short, they are guidelines implemented by a company regarding minimum amounts of share ownership certain employees must attain and retain.) The vast majority of public companies report having such guidelines in place, and, in my opinion it’s a matter of “if” and not “when” for the stragglers who haven’t implemented guidelines yet.
Many of you likely have some or all of these topics on your radar list. These are definitely trends to observe in the coming months; areas where we’ll likely see lots of activity, new ideas, and administration challenges.
Today we feature another guest blog entry, this time from Marlene Zobayan of Rutlen Associates, who will present on the panel “The Buck Stops Here (Unless, of Course, It Stops Somewhere Else)” at the 19th Annual NASPP Conference in November. The panel will use a case-study approach to define an effective strategy for addressing the taxation of globally mobile employees. Marlene’s co-panelists are Jim McBride of AST Equity Plan Solutions, Kate Forsyth of Deloitte, and Kimberly Kovacs of OptionEase.
The Buck Stops Here (Unless, of Course, It Stops Somewhere Else) by Marlene Zobayan, Rutlen Associates
These days, no discussion on the taxation of equity compensation seems complete without addressing the topic of mobile employees. For any one company, the numbers of mobile employees are usually small compared to the entire workforce, yet the administrative work caused by this small group of employees far exceed those of the fixed population.
The difficulties fall into three categories:
There is the administration burden of identifying and tracking who the mobile employees are.
Then there is calculating the correct taxes to apply. Of course, jurisdictions differ widely on what they determine to be their taxable portion resulting in a complicated tax calculation for each set of facts.
Finally there is the difficulty of getting the payroll and administration systems to administer what has been calculated, especially where the amount of income being taxed does not sum to 100%.
For the more advanced company, the impact of mobile employees carries through to the corporate tax deductions, which impacts deferred tax assets and ultimately the accounting expense of the equity compensation.
Although the technologies supporting these categories have come a long way, often manual intervention is still required to make sure the systems properly handle mobile employees.
To demonstrate these issues, the panel will focus on three specific examples of mobile employees who all receive similar equity grants. The examples follow common real-life mobility patterns, if there is such a thing. The audience will see how a mobile employee’s circumstances impact the taxation, employer withholding and reporting compliance, accounting, expense allocation and corporate deduction based on the countries involved and the type of mobility, e.g., whether someone is a temporary assignee, permanent transfer or a business traveler.
At our NASPP Sacramento Chapter meeting last Thursday, Jean Wong of Sun Microsystems said that in order to talk about global stock plan administration, you really do have to address the issue of global mobility. Global mobility truly is an issue that can impact all of your company’s stock plans. You may see it mentioned in presentations, articles, discussion forums, and even in opinions from your tax advisors. In fact, if you are looking for the latest information on global mobility, don’t miss the Traveling with Equity session at our Conference this year!
Whatever the context, there are some basic terms that are commonly used when discussing global mobility. I thought I’d take a moment to provide a short general glossary. Keep in mind that these terms may be used differently by some companies, and that many companies use their own nomenclature to describe situations and individuals internally. I tried to give the most general definition to the terms below; there may be situations where these terms are used in other ways. This short glossary is intended only to help you understand what you are hearing or reading when it comes to global mobility. Always consult your company’s tax advisor when making decisions about tax withholding and reporting.
Cross-Border Employee: Cross-border employees are either mobile employees (see below), or employees who live in one tax jurisdiction, but work in another.
Domestic Employee: Domestic employees live and work in one country and are citizens or residents of that country.
Expatriate: Expatriates are individuals who live and work outside their home country. Typically, “expatriate” is a term used by the home country for an individual who has left the country to work internationally. The host country would refer to the same individual as a foreign expatriate.
Foreign Expatriate: Foreign expatriates are employees who have left their home country to live and work in another country. Typically, this term is used by the host country for an individual who has come to the country to work domestically. It is also used by the U.S. to refer to expatriates whose home and host countries are both a country other than the U.S.
Foreign National: Foreign nationals are employees who live and work internationally, but remain in their country of citizenship or residency.
Home Country: This is the country where the employee is based. Typically, it is the country of citizenship or residency. There are situations where an employee is on assignment long enough that a new home country is established.
Host Country: This is the country in which the employee is working other than their home country. Some employees have multiple host countries during their employment with one company.
Mobile Employee: Mobile employees are those that work for the company in more than one tax jurisdiction over the period of employment with the company. These may be domestically mobile or globally/internationally mobile employees.
I’d like to give a special thanks to Lauren Downes for this idea! Stay tuned next week for common terms used specifically in the United States.
The NASPP Brings You the Experts
When we say we’re putting together a panel of experts to answer member questions, we’re serious about the experts. Valerie Diamond of Baker & McKenzie and Jon Burg of Radford–half the panel in our recent “Ask the Experts: Modifications of Equity Awards” webcast–were quoted extensively this week in the article “Options Exchanges Help to Generate Legal Work,” published in The Recorder and on Law.com. And, Thomas Welk, also one of the webcast panelists, discusses simultaneous acceptance of grants issued in a option exchange in this month’s SOS Xtra (published by Stock & Option Solutions).