h © 2001 arthur andersen all rights reserved. global executive share plans rachel e. lie october...

© 2001 Arthur Andersen All rights reserved.

h

Global Executive Share Plans

Rachel E. LieOctober 29, 2001


Agenda

• Global share plan benchmarks and case study

• Considerations in implementing global share plans

• Thinking strategically about your global plans (Fit-Cost-Value)


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%

13%

71%

81%

10%

26%

84%

35%

42%

10%

32%

50%

8%

10%

50%

73%

47%

6%

82%

65%

12%

29%

26%

63%

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

Generate corporate identity

Support cultural change

Match competitive practice

Recruitment and retention of skilledemployees

Improve perception of equality acrossborders

Deliver tax efficient remuneration

Encourage share ownership and aligninterests of employees with shareholders

Incentivize employees to achieveappropriate performance targets

North America Continental Europe UK


Global share plan survey - types of plans used

Senior employee plans

100%

3%

13%

52%

79%

17%

9%

10%

83%

12%

11%

61%

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

Market value option plan

Nil price or discounted option plan

Discounted share purchase plan

Free/restricted share plan

% of plans in operation


• The vast majority of plans cover the grant of market value options, particularly in North America


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


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


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.



• 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).



• 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.



• 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.



• 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.


Case study - executive deferred compensation plan

• Compensation Eligible for

Deferral

• Base salary (up to 50%)

• Payments made under the

Executive Bonus Plan (EBP)

• Discretionary bonuses

• Restricted stock units (RSUs)



• 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



• 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.



• 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.


• 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.




• 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.



• 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.



• 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.



• Company decision: do not extend to foreign employees.

• But what about US expatriates?


Considerations in implementing a stock plan


39%

26%

96%

96%

33%

8%

80%

83%

36%

29%

93%

86%

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

Local business practices

Local cultural issues

Legal issues

Tax issues


• Tax and legal issues play a significant part in companies’ decisions to implement plans overseas


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.


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



Comparison of the previous and current tax-qualifiedregime:

Previous Rules New RulesHolding Period 5 Years 4 YearsTaxation of theexercise gain ifholding period notmet

Income tax + CSG/CRDS + employers and employee socialsecurity rates

Taxation of optiongains if the holdingperiod is met

Exercise gainrealized on theexercise: 40% (foroptions grantedafter September 20,1995)

Capital gainrealized onsale: 26%, providedtotal proceeds foryear exceed FF50,000

Exercise gain realized on theexercise: <FF 1Million and sold before 2

years after exercise: 40% < FF 1Million and sold 2 years or

more after exercise (i.e., 6 yearsfrom the date of grant): 26% onthe amount

> FF 1Million and sold before 2years after exercise: 50%

> FF 1Million and sold 2 yearsafter exercise: 40%

Capital gain realized on sale: 26%,provided total proceeds for yearexceed FF 50,000



• 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



• 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


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


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


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


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)


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


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



• 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)



• 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


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)


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


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


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


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


Communication

16%

63%

60%

10%

60%

33%

60%

46%

2%

38%

23%

100%

15%

8%

77%

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

Newsletter

Booklet

Meeting/Presentation

Video

Email/Intranet


Senior Employee Plans

• Do your executives understand what they’ve got?


Plan Administration


58%

42%

50%

50%

56%

44%

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

Internally

Externally


• Do your executives need a personal touch?


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.


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.


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.


Questions?

h © 2001 arthur andersen all rights reserved. global executive share plans rachel e. lie october...

Documents

shares of stock

global share plans

arthur andersen

share value

share price

share ownership guidelines

share equivalent

employee ownership slide