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H © 2001 Arthur Andersen All rights reserved. Global Executive Share Plans Rachel E. Lie October 29, 2001.

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Presentation on theme: "H © 2001 Arthur Andersen All rights reserved. Global Executive Share Plans Rachel E. Lie October 29, 2001."— Presentation transcript:

1 h © 2001 Arthur Andersen All rights reserved. Global Executive Share Plans Rachel E. Lie October 29, 2001

2 © 2001 Arthur Andersen All rights reserved. Agenda Global share plan benchmarks and case study Considerations in implementing global share plans Thinking strategically about your global plans (Fit-Cost-Value)

3 © 2001 Arthur Andersen All rights reserved. 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

4 © 2001 Arthur Andersen All rights reserved. Global share plan survey - types of plans used The vast majority of plans cover the grant of market value options, particularly in North America

5 © 2001 Arthur Andersen All rights reserved. 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

6 © 2001 Arthur Andersen All rights reserved. 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

7 © 2001 Arthur Andersen All rights reserved. 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.

8 © 2001 Arthur Andersen All rights reserved. Case study - executive bonus plan 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).

9 © 2001 Arthur Andersen All rights reserved. Case study - executive bonus plan 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.

10 © 2001 Arthur Andersen All rights reserved. Case study - executive bonus plan 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.

11 © 2001 Arthur Andersen All rights reserved. Case study - executive bonus plan 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.

12 © 2001 Arthur Andersen All rights reserved. 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)

13 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan Timing of election to defer base salary December 15 th 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

14 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan Custody of deferred amountsThe funds are set aside in a Rabbi trust. The amounts deferred are at risk of forfeiture should the company become insolvent Form of distributionDeferred RSUs are paid in common stock; deferred cash amounts are paid in cash.

15 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan 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.

16 © 2001 Arthur Andersen All rights reserved. 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. Case study - executive deferred compensation plan

17 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan 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.

18 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan 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.

19 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan 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.

20 © 2001 Arthur Andersen All rights reserved. Case study - executive deferred compensation plan Company decision: do not extend to foreign employees. But what about US expatriates?

21 © 2001 Arthur Andersen All rights reserved. Considerations in implementing a stock plan Tax and legal issues play a significant part in companies’ decisions to implement plans overseas

22 © 2001 Arthur Andersen All rights reserved. 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.

23 © 2001 Arthur Andersen All rights reserved. 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

24 © 2001 Arthur Andersen All rights reserved. France - stock option taxation

25 © 2001 Arthur Andersen All rights reserved. France - stock option taxation 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

26 © 2001 Arthur Andersen All rights reserved. France - stock option taxation 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

27 © 2001 Arthur Andersen All rights reserved. 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

28 © 2001 Arthur Andersen All rights reserved. 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

29 © 2001 Arthur Andersen All rights reserved. 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

30 © 2001 Arthur Andersen All rights reserved. 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)

31 © 2001 Arthur Andersen All rights reserved. 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

32 © 2001 Arthur Andersen All rights reserved. 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

33 © 2001 Arthur Andersen All rights reserved. United Kingdom - stock option taxation 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)

34 © 2001 Arthur Andersen All rights reserved. United Kingdom - stock option taxation 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

35 © 2001 Arthur Andersen All rights reserved. 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)

36 © 2001 Arthur Andersen All rights reserved. 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

37 © 2001 Arthur Andersen All rights reserved. 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

38 © 2001 Arthur Andersen All rights reserved. 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

39 © 2001 Arthur Andersen All rights reserved. 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

40 © 2001 Arthur Andersen All rights reserved. Communication Senior Employee Plans Do your executives understand what they’ve got?

41 © 2001 Arthur Andersen All rights reserved. Plan Administration Do your executives need a personal touch?

42 © 2001 Arthur Andersen All rights reserved. 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.

43 © 2001 Arthur Andersen All rights reserved. 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.

44 © 2001 Arthur Andersen All rights reserved. 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.

45 © 2001 Arthur Andersen All rights reserved. Questions?


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