For most private companies, granting equity compensation is a big deal. First off, it’s complicated – you have to structure the awards, decide who’s eligible to receive what and when, figure out vesting dates, update your valuation. Second, it costs money, not only to set up the plan but to fund it and educate employees about it. Given the investment, you want to make sure your equity compensation plan can deliver on its objectives by fostering a culture of ownership that encourages employee loyalty and retention.
To achieve your aims, you likely got legal and tax advice and consulted with your HR team about equity plan structures, but that is not always a failsafe plan. Here are some unanticipated pitfalls that private companies may encounter, along with some strategies on how to avoid them.
In today’s remote, mobile and virtual world, it’s not unusual for employees to reside in one city, state or country to work in a different jurisdiction. If these employees receive equity awards, they may face unexpected tax obligations depending on where they live and work.
As an employer, it’s up to you to keep track of how many days your employees spend in different geographic locations, including different states. If a company gets this wrong, they may find themselves facing severe penalties for non-compliance. That’s something to think about not only with employees who travel frequently but also in the wake of COVID-19, which saw many employees either working at home instead of their “normal” location.
One solution? With Shareworks, you can track tax rates and rules in multiple jurisdictions in real-time so you can easily prorate compensation and withholdings for mobile employees.
Chances are not all your employees truly understand how equity compensation works. That’s why it’s important to provide robust educational resources. In fact, failure to properly communicate how your plan works can result in more than weak plan participation. It can also lead to the employees’ not grasping the value of their benefits and compensation outside of their salary.
Take the case of the employee who was granted restricted stock units. She was unaware that shares had been withheld to cover the taxes due and she quit her job in disappointment – costing the company a year of training and salary over a communication misstep.
In another case, a US company decided to provide its global employee base with an equal number of restricted stock units (RSUs). However, the amount, which was roughly equivalent to one week’s salary in the US, was worth almost six months’ salary in India. The following year, they corrected the mistake – but failed to communicate the change with their employees in India. The result was widespread disappointment that could have been prevented by communicating in advance.
One solution? Take the time to craft a multi-channel communication program tailored to your diverse base of employees. Shareworks can help by enabling you to house your educational resources directly on the platform, send out regular updates about plan-related events or offer around the clock employee assistance through our Support Center.
Regulatory and tax risks
Private companies with only a handful of employees in different countries sometimes don’t take the time to understand the regulatory and tax rules that apply to equity compensation in every jurisdiction where they operate. This can lead to a range of unintended consequences.
In some countries, employees aren’t allowed to participate in equity ownership at all. In others, tax is due as soon as a grant is issued rather than when it vests, putting employees in the awkward position of having to file returns and pay taxes on awards that may have only minimal value.
Some countries give employees an “acquired right” to their equity compensation if equity awards are offered as part of an employment contract. This means the equity awards could be considered part of an employee’s compensation even if the employee leaves the company before they vest.
There’s also a host of jurisdiction-specific rules that require companies’ full comprehension to ensure no mistakes are made. China, for instance, has a costly process that requires foreign companies to file with the State Administration of Foreign Exchange (SAFE) before they can grant local equity awards, except private companies generally aren’t allowed to file with SAFE. Other countries have strict rules around translating all plan documents into a native language.
One solution? Shareworks Global Intelligence makes available worldwide tax and regulatory information based on your subscribed countries so you can keep track of shifting rules and requirements.
Knowledge is power
Needless to say, there are countless other pitfalls private companies encounter every day when structuring their equity compensation plans. It’s best to meet with your legal and tax counsel to review.
Companies may also want to consider consulting with a Certified Equity Professional (CEP). Organizations like the National Association of Stock Plan Professionals (NASPP) and the Global Equity Organization (GEO) have a range of educational resources to review. Every year, Shareworks hosts Synergy, an event to share industry best practices and tips.
If you’d like to learn more about setting your company’s equity plan up for success, get in touch.