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.
If you are a company with employees in the European Union (EU) or European Economic Area (EEA), you’ve likely long been aware of the stringent data privacy requirements surrounding the transmission and protection of data for those residing in that region of the world. To facilitate compliance with certain aspects of data privacy requirements, some companies relied (in all or part) upon the EU-US Safe Harbor Privacy Program (“Safe Harbor program”), which allowed for transfers of personal data for EU/EEA residents to US companies registered under the program. On October 6, 2015, the European Court of Justice ruled the Safe Harbor program invalid. What is the impact of this ruling on data transfers relative to stock plans? I’ll explore this question today’s blog.
If your company is a US based company, it’s likely that most or all of your stock plan data is housed in the US. This means that if your plan includes participants in the EU/EEA, their data needs to be sent to the US to be recorded and maintained in the stock plan recordkeeping system. That recordkeeping system could be maintained in-house, or externally via a third party, who also likely maintains data within the US. Additionally, there may be a need to transfer participant data to other third parties who support the company’s stock plans beyond recordkeeping services.
According to the Baker & McKenzie client alert,
“The impact of the ruling on the personal data collection /processing / transfer activities of US multinationals in the context of offering of equity compensation programs to European employees depends upon whether the company had relied on Safe Harbor in this context – or, instead, relied on an alternative method for managing data privacy considerations (e.g., relying on express consent obtained from participants, either through acceptance of its equity award agreements or provided as part of the local new hire on-boarding process). If alternative methods have been relied upon, the ruling is unlikely to have any impact on the equity program. If the company relied on Safe Harbor, it will likely need to start relying on an alternative method.”
The transfer of data provided to brokers is unaffected by this ruling, because financial institutions were never eligible to register under the Safe Harbor program, and as a result, it was never possible to rely on that program to transfer employee data to a broker. Companies had to find an alternate, permissible means of transferring data to brokers. Considering the now-invalidated Safe Harbor program, that is good news for data transfers to brokers or financial institutions, because they were never covered under the program and should remain unaffected by the ruling.
Is Our Stock Plan Affected?
If you have no stock plan participants in the EU/EEA, then this ruling does not affect your stock plans. This only applies to the data of those residing in that region of the world.
For companies that do have stock plan participants in the EU/EEA, the answer to that question is “it depends.” It depends on how the company was complying with data transfer requirements prior to the ruling, as described above. If your company relied on the Safe Harbor program in any capacity, then an alternate method for transferring that data will need to be used.
If your company has no participants in the EU/EEA, but decides to offer equity in that region in the future, it’s important to know that the Safe Harbor program will not be available as a means of compliance with data transfer requirements.
What’s Next?
This ruling has created a wave of turmoil, and not just for equity plans. It’s likely other company functions such as Human Resources are impacted, too. Baker & McKenzie’s suggestion is that “Companies should review their practices with regard to data privacy, including in the context of operating their equity compensation programs. Even if the ruling does not have any direct impact on the equity program, data privacy requirements around the globe are tightening and a regular review of your company’s approach to data privacy is highly recommended.”
There is also talk of a Safe Harbor 2.0, with no telling on a timeline or potential for success of such an initiative. It’s important that companies recognize the implication of this ruling beyond the immediate affect on employee data transfers. The action of invalidating the entire EU/US Safe Harbor program seems to suggest that the EU has broader concerns about the US’s ability to protect the data of their residents, and it’s possible that other methods of complying with data transfers may follow in being evaluated for efficacy of protecting privacy. Expect the topic of data privacy to be a hot one for 2016.
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.
Here are the results to my random questions in last week’s blog entry.
Terminated Employees & Black-out Periods
Two-thirds of respondents (37 out of 54) do not subject terminated employees to black-out periods.
For those respondents that do subject employees to black-out periods, the majority (11 out 16 respondents), don’t make any accommodation for them. The terminated employees are simply expected to finance their exercises in a way that doesn’t involve an open market sale.
Two respondents noted in the comments that they would automatically exercise the options if they aren’t exercised by the end of the exercise period. One person noted that their black-out period is shorter than their post-termination exercise period, so this hasn’t been a concern for them.
Evaluating Stock Plan Administration
The majority of respondents don’t have any specific metrics that they use to evaluate the performance of the stock plan administration team (which probably explains why no one has responded to this question in the NASPP Discussion Forum).
Of the metrics suggested in the question, the most popular choices were:
Accuracy of reports produced for tax/financial purposes (7 respondents)
Total time spend on various tasks (e.g., employee inquiries, processing transactions, reporting) (4 respondents)
One respondent indicated that they are evaluated on their average time to resolve employee inquires/escalations and one respondent indicated that they are evaluated on the processing and direct costs per participant.
Some of the metrics suggested in the other comments were:
Timeliness and accuracy of all transactions, participant communications, and tax/financial reporting
Demonstration of increasing knowledge and ability to take on more complex tasks
Quality of response to employee inquiries/escalations
ESPP participation
Responsiveness to plan managers and various company contacts in addition to participants
Personally, I think that having at least a rough idea of how much time you spend on various tasks is an important and valuable metric to be aware of. It can be very helpful when trying to prioritize various initiatives and projects. For example, if tax reporting takes a huge amount of time compared to everything else you are doing at year-end, that might be an indication that you need to invest in improving your tax reporting processes.
I’m also a big fan of the ESPP participation metric, but only if you have the proper tools and resources to impact this (e.g., education budget, attractive plan, etc.)
Grant Conversion
Close to 90% (38 out of 43 respondents) don’t convert grant values into foreign currency before determining grant sizes for non-US participants.
I needed a quick blog entry for today (Jenn is on vacation), so I decided to do another poll with questions that have been posted recently to the NASPP’s discussion forum. If they apply to you, please take a moment to indicate your answers so we can help these folks out. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll). Thanks for indulging me!
This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers. Today’s entry is written by Jon Doyle of International Law Solutions, who will lead the session “The Amazing Race–Revisiting Global ESPPs.”
Companies are increasingly revisiting global ESPPs. Whether your company has offered its ESPP globally for years, is considering starting or re-starting an ESPP, or expanding your existing ESPP into new countries, this session is for you. The panel will take an in-depth look at global ESPPs.
Increasingly, with complex and expensive regulatory obstacles, as well as low participation in some cases, companies are more selective in offering their ESPPs around the world. In addition, companies that may have suspended their ESPPs internationally due to compliance, participation and budgetary concerns, are increasingly exploring offering their ESPPs in new markets. The panel will discuss the importance of setting expectations on participation and educating executives and local management about global ESPPs.
We will examine the regulatory challenges of a global ESPP, including the unique issues presented by Section 423 plans and how a non-423 component may be of use to you. We will discuss balancing the goal of offering an ESPP broadly while staying compliant. We will explore how to navigate through compliance and administrative roadblocks, as well as the impact of a company’s corporate structure on these plans. The panelists will share their experiences and best practices for successfully offering ESPPs globally.
Don’t miss this session, “The Amazing Race–Revisiting Global ESPPs,” presented by Jon Doyle of International Law Solutions, Bob Hartley of BMC Software, Wendy Jennings of Riverbed Technology, and Kate Lloyd of Accenture at the 20th Annual NASPP Conference in New Orleans, October 8-11.
This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers. Today’s entry is written by Marlene Zobayan of Rutlen Associates, who will lead the session “Keeping Up With The Updates.”
When I first started in the global equity field over 15 years ago, we would prepare specific reports for companies wishing to offer equity globally. For each client, we would send their plan to a local expert in each country who would write a report on the tax and legal consequences of that plan. The overall report would be compiled by a US representative who managed the relationship with the client and talked the client through the findings. In a field that was new to most, this process a good path to follow. It was a surprise to most companies that not all countries followed the same logic as the U.S. when taxing equity compensation.
However, as time went on, the information became more readily available and the level of knowledge among industry members grew. It is no longer ‘news’ to anyone that Australia taxes stock options at vest or that the employer can save money through a French qualifying plan. In fact most of this information is now readily available on the web. However, now we have the opposite issue–the information available is overwhelming, confusing to the layperson and oftentimes contradictory. Additionally, the underlying laws seem to change at an unprecedented rate, for example the first quarter of 2012 there were at least 24 updates of new and pending legislation impacting global equity awards.
Information Overload?
Many accounting, consulting and law firms distribute newsletters to clients and friends whenever there is a change in the international laws impacting equity awards. While a useful tool, and often extremely well written and informative, the net result is that many companies get inundated with similar newsletters from different sources. There is little time to read and understand them all.
Regardless with the rapid pace of international developments all global companies must make the time and effort to keep up to date otherwise they can quickly find their practices and processes out of date and non-compliant.
A Free Resource for NASPP Members
In the NASPP Conference session “Keeping Up With The Updates“, the panel will review the wealth of information available on the NASPP’s Global Stock Plans Portal. These include the alerts which notify companies of updates and the Country Guides, all organized in a searchable archive by country. These resources provide a good foundation for an administrator whose company is expanding into a new country, extending a new type of plan or who simply wants to stay up to date. Although the NASPP global portal is a great resource to educate yourself, it is not a substitute for professional advice. The panel will help companies understand how to identify when the free resources are insufficient, and technical expertise is needed. Finally, the panel will cover some recent updates with a surprise guest.
How many other sessions can help keep your company out of trouble, save you money and provide a surprise guest too?
Mastering ESPP and RSU Withholding Outside the United States By Jennifer Kirk and Narendra Acharya of Baker & McKenzie
In today’s world, your company cannot afford to be noncompliant with its global stock plan withholding and reporting obligations. On a daily basis, we hear about the fiscal challenges affecting governments around the world. In addition to the cutbacks of programs and increased taxes and fees, governments remain focused on greater enforcement of existing tax obligations. In a number of countries, revenue collected from employer tax withholding (including employer and employee contributions to social taxes) is often the largest source of tax revenue–but still not sufficient. Whether through increased frequency of payroll audits, hiring more specialized teams of auditors, and/or more robust or extra reporting requirements, it is reasonable to expect that stock plan withholding practices will be facing increased scrutiny on a global basis.
As a general example, in December 2010, the UK tax authorities (HMRC) published a discussion document aptly titled “Improving the Operation of PAYE – Collecting Real-Time Information.” Not content to rely on payroll filings, which may only be made annually, and the periodic audit, HMRC in the discussion document envisions a process where it is electronically notified whenever payment is made to an employee and would confirm that the appropriate income tax and social taxes (National Insurance Contributions) have been deducted. The latest version of the discussion document no longer contains the more controversial proposal of having the compensation funds flow from the employer to HMRC (as a “central calculator” and disbursement agent) and then to the employee. Regardless of the outcome of the proposals, they are a great example of government’s focus on getting the money sooner and greater review of payroll calculations.
While a “central calculator” may not be imminent in the UK, even the current employer withholding and reporting requirements in the UK, as an example, can be challenging. First, there are additional reporting requirements beyond traditional payroll reporting that apply to equity compensation plans. This includes the annual share schemes return (Form 42) where the details of equity grants need to be specifically reported. The HMRC is then better able to cross-check the annual payroll reporting done by the UK employer to confirm that the taxable amount of equity compensation is indeed reported (and withheld upon) correctly. Second, there are timing requirements such that if the appropriate UK tax is not collected within 90 days, the employee is deemed to receive an additional benefit from the employer equal to the tax that should have been withheld, but on a grossed up basis. In short, noncompliance in the UK can be quite expensive.
During the 19th Annual NASPP Conference, the session “Mastering ESPP and RSU Withholding Outside the United States” will answer the key questions: the who, what, where, why and how of withholding for global stock plans. Don’t allow your company to be an easy target for foreign governments seeking tax revenue, as the penalties (and unwelcome scrutiny from foreign tax agencies) will be a much greater burden than ensuring that it gets done correctly in the first place.
Are you staying current with international developments that may impact your company’s equity compensation program? You will find many essential tools in the NASPP Global Stock Plans portal to keep up-to-date. If you haven’t browsed through the portal recently, you really need to check out our latest feature; the Stock Plan Compliance Evaluation tool.
The Stock Plan Compliance Evaluation tool is available only to NASPP members. To access, click on the link that is under the Country Guides on the NASPP Global Stock Plans portal. This evaluation tool, provided by GlobalSharePlans, is a fantastic interactive tool that you can use to evaluate your international stock plans. By choosing your countries of interest, you can get an instant overview of the potential issues to be aware of. If you are seeking greater detail, head to the “Plan design by country” drop-down and run a personalized healthcheck on your plans by including applicable details. The Stock Plan Compliance Evaluation tool may be available this year only, so take advantage now!
We also continue to get regular updates to our Country Guides, Alerts, Articles, and Quarterly Updates. If you don’t already, sign up now to receive country alerts. You can subscribe to receive alerts for just the countries your company does business in, or all countries on the list! And, here’s a tip you may not be aware of: you can search the archive for alerts on a particular topic, or find a summary of individual country alerts in each Country Guide link. Here is an alert that recently caught my eye:
Korea: The Korean government recently updated its position on the deductibility of employee stock options costs to a Korean subsidiary or branch. The Korean subsidiary or branch will now be able to deduct the costs associated with employee stock options issued by a foreign parent company as long as the subsidiary incurred the costs directly or through a recharge agreement. Because of this new position, when the Korean subsidiary or branch bares the cost of employee stock options, the employee’s stock option income will be subject to income tax and social security tax withholding. Additionally, the Korean government clarified that in many cases, the income assessed and subsequent tax withholding on income from stock options earned by mobile employees will be calculated pro-rata for the time spent in Korea.
Our Global Stock Plans portal Task Force Members regularly contribute in-depth articles and quarterly newsletters. Valerie Diamond and Barbara Klementz from Baker & McKenzie recently contributed the “Top 10 Things You Need to Know for Option Exchanges Involving International Employees”. A great reminder included in this valuable list is that there are countries where the employee and/or the local entity have had to pay taxes on the options at grant. Additionally, it is likely that neither the employee nor the local entity may be able to obtain a refund or tax credit and will owe taxes again at grant for the new option.
Don’t miss out on the latest developments; be sure to put a regular review of the NASPP Global Stock Plans portal on your schedule!