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Global Stock Plan Design and Redesign: Issues Relating to Broad-Based Plans 2001 Global Equity Compensation Forum San Francisco, California November 5, 2001. Edward D. Burmeister Baker & McKenzie Two Embarcadero Center, Suite 2400 San Francisco, California 94111 (415) 576-3029
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Global Stock Plan Design and Redesign:Issues Relating to Broad-Based Plans2001 Global Equity Compensation ForumSan Francisco, CaliforniaNovember 5, 2001 Edward D. Burmeister Baker & McKenzie Two Embarcadero Center, Suite 2400 San Francisco, California 94111 (415) 576-3029 edward.d.burmeister@bakernet.com
TYPES OF BROAD-BASED PLANS/AWARDS Long-Term Incentive Plan or Omnibus Stock Plan • Stock Options (Always) • ISOs • Non-Qualified Options • Restricted Stock • Typical for Executives • Other Awards • SARs • Stock Bonuses • Restricted Stock Units
BROAD-BASED AWARDS Hire Grants (Silicon Valley Model) • All-Employee, “One”-Time Grant • Ongoing Broad-Based Grants
STOCK PURCHASE PLANS • 423 Design • Non-423 Design • Open Market • No Discount Plans • Other
OBJECTIVES FOR BROAD-BASED PLANS One-Time Grant Programs • Recognition Event • Global “Branding” to Employees • Communication Vehicle for Corporate Values, Identify With Creating Shareholder Value • Not Typically Designed As Compensation
HIRE GRANTS AND ONGOING GRANT PROGRAMS • Recruitment and Retention • Recruitment and Retention • Competitive Practice • Incentive for Performance • Intended As Compensation
EMPLOYEE STOCK PURCHASE PLANS • Competitive Practice • Recruitment • Encouragement for Share Ownership by Employees • Build an Ownership Culture
STOCK OPTIONS VERSUS STOCK PURCHASE Stock Option AdvantagesStock Purchase Advantages Ease of Administration/ Employee Makes Investment Flexibility Virtually Universal and No ISS Concerns Well Recognized Participation Can Be Up Less Dilution 100% Vesting for Retention More Share Ownership Likely Automatic “Repricing”
STOCK OPTIONS VERSUS STOCK PURCHASE Stock Option DrawbacksStock Purchase Drawbacks Dilution 423 Design Inflexible ISS Resistance More Difficult Administration Underwater Options a Lower Participation Disincentive Little Employee Share Withholding Issues Outside Ownership U.S.
STOCK OPTION PLAN DESIGN • Global One Size Fits All Design • Global Design With Limited Local Variations • Global Plan With Significant Local Customization
ONE SIZE FITS ALL DESIGN • Pros: • Simplicity • Transfers Easier to Accommodate • Equity of Design • Cons: • Unfortunate Employee Tax Results • France • Italy • Netherlands • Switzerland • Belgium
ONE SIZE FITS ALL DESIGN (Con’t) • Cons: • Unfortunate Company Social Taxes • France • U. K. • Italy • Sweden • Norway • Failure to Take Advantage of Local Tax Advantages • U. K. • Ireland • Israel • Austria • Singapore • Italy
TOTAL CUSTOMIZATION • Pros: • Maximizes Employee Tax Results • Locally Competitive • Can Reduce Employer Social Costs • Cons: • More Difficult to Administer • Potential Inequities Within Company • Loss of Central Control
RECOMMENDATIONS • Draft Plan to Permit Local Customization • Sub-Plan Authorization in Option Plans • Non-423 Component in ESPP • Decide Process and Parameters for Local Customization • Retain Ultimate Central Control • Do Customize Agreements/Enrollment Forms
OTHER DESIGN RECOMMENDATIONS • Avoid Beneficiary Forms (at Least in ESPPs) • Avoid Transferability Outside U.S. • Avoid Stock-for-Stock or Attestation Exercise Methods Outside U.S.
OTHER DESIGN RECOMMENDATIONS (Con’t) • Avoid U.S. Centric Inflexible Provisions • 10-year Term • One-Year Post-Death Exercise • Compensation Definition in ESPP • Definition of “Subsidiary” in Option Plan • Methods of Exercise Locked In • Disavow Maintaining “Qualified” Status • Tailor Labor Law Language
WHAT IS END RESULT? • Option Plan • Flexible And General Plan Language • Authorization for Sub-plans and Country-Specific Modifications • Much Discretion in Committee
WHAT IS END RESULT? (Con’t) • Option Plan • Country-Specific Design Modifications • U. K.: Approved Plan and NIC Pass-Through • France: - Qualified Plan – 4-Year Requirement Mandatory - Closed Period Avoidance • Italy: Prior Month’s Average Price as Minimum Grant Price
WHAT IS END RESULT? (Con’t) • Option Plan • Country-Specific Design Modifications • Netherlands: Election to Defer Tax: “Pre-Acceptance” or Mandatory Cashless Exercise • Belgium: Special Offer Letter and Undertaking Consideration of Bank Products To Minimize Employee Tax Problem
WHAT IS END RESULT? (Con’t) • Option Plan • Country-Specific Design Modifications • Switzerland: Cantonal Tax Rulings on 10-year, 6-month Term or Mandatory Cashless • Singapore: Use of CSOP Scheme • Ireland: Consider Approved Plan • Austria Consider Tax-Advantaged Plan
WHAT IS END RESULT? (Con’t) • Option Plan • Country-Specific Design Modifications • Israel: Consider 102 Plan • Mandatory Cashless Exercise • Azerbaijan • Brazil • Bulgaria • China • Croatia • India • Indonesia • Morocco • Nigeria • Romania • South Africa • Thailand • Uzbekistan • Yugoslavia
STOCK PURCHASE PLANS • Plan Redesign • 423 Plan Component • Non-423 Plan Component • Coverage of “Affiliates” Rather Than Subsidiaries • Sub-Plans Authorized
STOCK PURCHASE PLAN (Con’t) • Country Modifications • No Payroll Deductions (Alternatives: Direct Deposit, Checks) • Hong Kong, Argentina, Mexico (Documentation May be Structured to Permit) • Separate Accounts • Australia • Japan (if held by local sub) • Korea
STOCK PURCHASE PLAN (Con’t) • Country Modifications • Immediate Transfer of Payroll Deductions • Coverage of Part-Time Employees • EU Countries
COUNTRY-SPECIFIC OPTION AGREEMENTS • Tax Clauses • Labor Law Language/Acknowledgement • Not Part of Severance • Discretionary • Data Privacy Consent • Special Clauses – France, U.K., Italy, Other
STOCK PURCHASE PLAN • Tailor Enrollment Form: • Taxes, Labor Laws, Data Privacy • Specific Clauses for United Kingdom (Deemed Loan) • Qualified Arrangements • U. K.: • SAYE • AESOP
STOCK PURCHASE PLAN (Con’t) • Qualified Arrangements • Ireland: • SAYE • France • P.E.E. • Japan • Employee Association • Company Structure Issues • Check-The-Box Issues • Branch Issues