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

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

3. The global landscape 1

4. 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

5. 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

6. 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

7. The global landscape (cont’d)

8. Equity trends 2

9. 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

10. Equity grant practices
2.1

11. 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 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.

12. 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

13. 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

14. 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

15. 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

16. 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

17. Tax compliance and planning
2.2

18. 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.

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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.

25. 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

26. 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

27. Equity administration
2.3

28. 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 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.

29. 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

30. 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 to
EE's Company
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

31. What does this mean for you?
2.4

32. 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

33. Going global? 3

34. 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?

35. 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?

36. 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

37. 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.

38. 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?

39. 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?

40. 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?

41. 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

42. Conclusion 4

43. Presenters
Shane Smailes PwC Partner Melbourne P:
Michelle Kassis
PwC Director
Melbourne P:

44. pwc.com.au
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