Equity in a global landscape pwc.com.au Equity in a global landscape Shane Smailes & Michelle Kassis

Agenda 1 The global landscape 2 Equity trends Grants Tax compliance and planning Equity administration What does this mean for you? 3 Going global?

The global landscape 1

The global landscape 83% of CEOs expect to grow operations in South East Asia 59% of CEOs see emerging markets as more important than developed markets to their future More than half of CEOs are planning to move experienced employees from their home market to newer markets to circumvent skills shortages. Source: 15th PwC Annual Global CEO Survey Global growth

The global landscape (cont’d) 53% of CEOs see lack of key skills as a major challenge One in four CEOs say lack of talent has meant cancelling or delaying a strategic initiative 78% of CEOs are demanding a change to strategies for managing talent (The number one priority for CEOs). Source: 15th PwC Annual Global CEO Survey Skills shortages

The global landscape (cont’d) 71% of Millenials expect and want to do an overseas assignment during their career More than half of Millennials expect to have between two to five employers during their working lives (a quarter expecting to have more than six). Source: Millennials at work – Reshaping the workplace Millennials re-shaping workforce

The global landscape (cont’d)

Equity trends 2

Equity trends Each year PwC undertakes a global equity incentives survey which examines the equity and incentive compensation practices of 185 multinational companies. We will present some of the survey findings to paint a picture of the global landscape and how it has changed since 2009. Source: PwC 2011 Global Equity Incentives Survey- The Rise of Performance-based Equity

Equity grant practices 2.1

Equity grant practices Key driver of equity compensation continues to be alignment of compensation strategy to business strategy. However there was a notable shift in “addressing issues raised by the Board” which increased from 1% in 2009 to 9% in 2011. There is a continuing decline in service based stock option awards. Performance based shares/units are now more popular than at any time in history. Restricted Stock and Restricted Stock Units are becoming the most common vehicle in virtually all industries and among companies based in every surveyed country.

Equity grant practices (cont’d) Drivers of changes in equity comp 60% 50% 40% 30% 20% 10% 0% Align Comp with Business Strategy Market Trends To address issues raised by the Board of Directors Int'l Coordination Changes made – Other Corp Governance Issues Options Out of Money Dilution/Issues Raised by ISS Tax Issues Accounting Issues 2009 2011

Equity grant practices (cont’d) Type of equity offered 2009 2011 9% 9% Phantom Stock 9% 6% 2009 2011 5% 7% SAR 3% 2% 2009 2011 7% 7% Stock Settled SAR 3% 6% 2009 2011 33% 26% RSU 34% 27% 2009 2011 23% 16% RS 23% 20% 2009 2011 28% 17% Options 10% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Performance-based Market-based

Equity grant practices (cont’d) Most frequently cited performance/market targets 35% 30% 25% 20% 15% 10% 5% 0% EPS Shareholder Return Revenue/ Growth Other Stk Price/TSR Relative to Peers Cash Flow EBITDA Stk/Share Price EBIT 2011 2009 2007

Equity grant practices (cont’d) Vesting periods 100% 17% 15% 14% 15% 90% 17% 25% 16% 80% 27% 70% 9% 9% 60% 11% 26% 28% 8% 50% 38% 36% 40% 30% 34% 31% 20% 10% 12% 12% 0% Options/SARs RS/RSU/Phantom Options/SARs RS/RSU/Phantom Executives VPs/Mgr 3 years – cliff 3 years – graded 4 years – cliff 4 years – graded Other

Equity grant practices (cont’d) Reasons for shareholder dissatisfaction in equity plans 70% 60% 50% 40% 30% 20% 10% 0% Want More Restrictions in Exec Comp Want More Control Over LTIs Other Concerned about Dilution Want More Links to Co Performance Plans Too Generous Want More Control Over Risk Concerned About Oversight Want More Predictability in Budgeting Comp Expense 2011 2009

Tax compliance and planning 2.2

Tax compliance and planning Companies remain focused on achieving both local employee and company tax efficiency/savings and global compliance. While the most challenging aspect of offering equity remains “compliance”, “communication” and “cross departmental coordination” also present significant challenges. The most challenging tax compliance countries have proven to be China, the United Kingdom, the United States, France, India and Australia.

Tax compliance and planning (cont’d) Most challenging aspects of offering equity 80% 70% 60% 50% 40% 30% 20% 10% 0% Compliance Administration Global Grant Guidelines Communications Cross-country Coordination Cross-departmental Coordination Other 2011 2009

Tax compliance and planning (cont’d) Companies audited in the last three years (as % of responses) 40% 35% 30% 25% 20% 15% 10% 5% 0% Germany UK France US Japan China Netherlands Philippines Singapore South Africa South Korea Switzerland 2011 2009

Tax compliance and planning (cont’d) Countries with most challenging tax compliance US UK Switzerland Singapore Russia Philippines Netherlands Japan Italy Ireland India Hong Kong Germany France China Canada Brazil Belgium Australia Argentina 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2009 2011

Tax compliance and planning (cont’d) Prevalence of internal compliance reviews 2011 2009 2007 60% 50% 40% 30% 20% 10% 0% All (100%) Most (50% or more) Some (49% to 26%) A few (Less than 25%) None

Tax compliance and planning (cont’d) Frequency of internal compliance reviews 70% 60% 50% 40% 30% 20% 10% 0% Upon Implementation the plans Every 6 months or more frequently Annually Every 2 years Other 2011 2009 2007

Tax compliance and planning (cont’d) Recharge of plan costs Main driver behind charging back equity costs to foreign affiliates is to secure corporate tax deductions. This showed a significant increase from 23% in 2009 to 44% in 2011. 80% of participants indicated they have a recharge agreement in place – a drop of 14% from 2009 figures.

Tax compliance and planning (cont’d) Reasons to start charging back equity plan costs 2011 2009 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% To secure local tax deductions Both of the above To mitigate costs associated with expensing Other

Tax compliance and planning (cont’d) If you charge back, what/when is the subsidiary charged 30% 25% 20% 15% 10% 5% 0% Grant date fair value Spread/value at time of settlement Spread minus grant date fair value Filing and reporting fees Consulting and advisory costs at grant from grant to vest at settlement

Equity administration 2.3

Equity administration While the most challenging aspect of offering equity is “compliance” interestingly the most significant jumps were in “communications” which increased from 31% in 2009 to 48% in 2011 and “cross country co-ordination” which increased from 30% in 2009 to 46% of participant in 2011. 39% of participants in 2011 delivered their award agreements via the administrator’s internet site compared to 25% in 2009. A notable increase in employees acknowledging receipt at grant via an electronic system hosted by the Company was seen from 9% in 2009 to 48% in 2011 – a gain of 39%. 65% of participants use an external stock plan administrator to store their equity data which is consistent with 2009. There was a drop in storing equity data “in-house using database application”. 35% of participants said their stock plan administration software was not adequate to meet their tax needs. An increase of 13% from 22% in 2009 to 35% in 2011.

Equity administration (cont’d) Current primary service provider 80% 70% 60% 50% 40% 30% 20% 10% 0% Financial Services – Full Service Brokerage Financial Services – Bank Third Party Recordkeeper Transfer Agent/ Registrar Financial Services – Discount Brokerage Other 2011 2009 2007

Equity administration (cont’d) Method of award agreement delivery 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Posted on the Administrator’s Internet Site Sent by Email to EE's Company Email Address Mailed to EE's Home Address Mailed to EE's Work Address Other Posted on the Company’s Intranet Site No Award Agreements Distributed 2011 2009 2007

What does this mean for you? 2.4

What does this mean for you? Between 2009 and 2011 there was a notable drop in companies offering service based stock options from 46% to 24%. Service based plans in Australia still remain the most prevalent when compared to performance and market based plans. In 2011, 67% of Australian companies offering a share purchase plan had participation levels of between 0% – 25% and 20% of companies had participation levels between 26% - 50%. When compared to 2009, 44% of companies had participation levels between 26% - 50% and 36% of companies had participation levels between 0% – 25%. The most common vesting condition in Australia remains continued employment of 3 – 4 years and is used by 45% of companies. Continued employment for 2 – 3 years comes in at 33%. 72% of companies surveyed had not considered the impact of payroll tax on equity plan awards in certain states. Australia

Going global? 3

The changing face of mobility Going global? What What are your obligations from a tax, regulatory and legal perspective? Why How How will you deal with administrative complexities? Ownership Who will own administration of the plan? Why do you want to offer the plan internationally? Mobility matters How will you deal with mobile employees?

The changing face of mobility Going global? (cont’d) Why Why do you want to offer the plan internationally? Consider why you want to offer the plan internationally. What objective are you trying to achieve? What benefit do you want to provide?

Reasons for offering equity internationally 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% To create a uniform global equity/stock compensation benefit To offer our employees the opportunity to become shareholders To match offers made by non-local competitors domestic competitors Other 2011 2009 2007

The changing face of mobility Going global? (cont’d) What What are your obligations from a tax, regulatory and legal perspective? Understanding the tax, regulatory and legal implications in the countries that you wish to offer equity is of paramount importance.

The changing face of mobility Going global? (cont’d) How How will you deal with administrative complexities? How will you communicate the plan globally? Understand the limitations of your global systems – can your payroll handle equity awards in all locations? Can your share plan administrator deliver equity in the countries that you operate? Will you recharge plan costs/can you recharge costs?

The changing face of mobility Going global? (cont’d) Ownership Who will own administration of the plan? Implementing a plan globally works best where there is central ownership of the administration of the plan. Where will this ownership sit? Who will monitor tax, legal and regulatory filings and ensure they are undertaken in a timely manner?

The changing face of mobility Going global? (cont’d) Mobility matters How will you deal with mobile employees? Where plans are implemented globally, it generally allows mobile employees to continue participating in the plan regardless of whether they move from one country to another. The movement of employees throughout the life of an award creates tax complexities as it can generate trailing tax liabilities long after an employee has left a location. Many of the tax obligations which arise are employer obligations – How will you track and deal with these liabilities?

Methodology to track expatriates from grant to settlement Going global? (cont’d) Methodology to track expatriates from grant to settlement 25% 20% 15% 10% 5% 0% Excel Spreadsheet Mobility Department Other Stock Plan Administration ("SPA") Software – "Snapshot" Only SPA Tracks Historic Mobility Reconcile SPA Software to Payroll Stubs 2011 2009

Conclusion 4

Presenters Shane Smailes PwC Partner Melbourne P: +61 3 8603 6097 Email: shane.smailes@au.pwc.com Michelle Kassis PwC Director Melbourne P: +61 3 8603 5676 Email: michelle.kassis@au.pwc.com

pwc.com.au © 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Liability is limited by the Accountant's Scheme under the Professional Standards Act 1994 (NSW) WL243336