Picture this: Several months after initial discussions, of which you were vaguely aware, your company announces one morning the opening of a new subsidiary in China. The next day you’re given a list of locally hired employees for whom stock option grant agreements need to be prepared. The grants are to be included in the monthly new-hire grant, which is 10 days away. You feel a sinking sensation in the pit of your stomach when your primary point of contact in HR tells you he doesn’t know what you mean by “SAFE approval,” and you find out that your legal and tax colleagues had assumed the China stuff was being handled by outside counsel. Later that same day, you happen to learn during a casual conversation about the new facility in Milan, and that Steve Jones is headed there to be the new general manager. He’s relocating from the Dublin plant where he’s been for the last three years. But the last you heard, he was the assistant manager in Wales.
You reach for the Zantac as it occurs to you that the first company-wide restricted stock unit grant made four years ago vests in two weeks, and that Steve was among the grantees but he’s not on the master list of globally mobile employees. Then, just as you’re shutting down your laptop, you notice you’re copied on an email from the payroll manager in Australia to all local ESPP participants. You sit down and bury your head in your hands after you read a well-intended but completely inaccurate explanation of the $25,000 purchase limit that’s just gone out to over 300 employees. Your company has gone global. You’re about to go postal.
Situations like this are all too common in stock plan administration. But when internal stakeholders understand what’s required to grant share-based awards in a new jurisdiction, stock plan administrators can cool it on the Zantac. In part one of this white paper, Shareworks by Morgan Stanley identifies what the HR team needs to know about going global.
Human Resources team
At the point the company begins to contemplate extending a plan to another country, HR should contact the stock plan administration (SPA) group to get the ball rolling. Implementing a share plan outside the country where a company is headquartered (i.e., the home country) requires much planning and preparation prior to launch. A company should not assume that it can hire employees in a new jurisdiction and grant the same types of share-based awards that are granted in the home country.
Know the jurisdiction
Begin by assessing the new country’s compensation culture and regulatory environment, then determine if you need to tailor the plan as well as its documents and communications materials. Country-specific rules may help the HR team decide whether expats and local nationals should receive different award terms – or even if the types of awards they want to offer in the new country are in fact appropriate. Laws in the new country regarding taxation of share-based compensation may affect the value, real or perceived, of the share-based award. And if you choose to implement a tax-qualified plan in one or more countries that offer qualified schemes, the HR team should consider whether the SPA team is administratively prepared to fully comply with the various constraints typically associated with qualified plans.
China’s State Administration of Foreign Exchange (SAFE) registration and approval process, mentioned in our nightmare scenario, is required for stock options, restricted stock units, restricted stock and employee stock purchase plans offered to Chinese nationals employed within China. The registration must be completed before launching the plan. The lead-time is typically around six months but could be longer depending on factors beyond your company’s control. The process involves, among other things, translating plan documents, setting up special bank accounts, and perhaps implementing additional processes not used in the company’s other locations.
Understand the expensing
Another consideration is the manner in which grants will be expensed. While your company’s accounting team will be responsible for determining that, certain plan-design decisions made by the HR team could affect the the share-based compensation’s cost to the company. For example, specific types of grants and terms, such as cash (versus share) settlement and performance-based (versus time-based) vesting, could result in a higher expense. Since share-based compensation costs may be charged back to the local entity, local management should be involved in the decision and understand the impact to the local entity’s financials before the group comes to a decision.
Beware of local employment laws
Employment and data privacy laws vary from one country to another and, particularly for U.S. companies, can be the source of some unpleasant surprises down the road if they don’t carefully draft employment contracts and grant agreements. Even changes in plan design, such as a new award type, as well as corporate transactions (e.g., mergers, acquisitions) can carry regulatory implications and present administrative challenges for the HR team.
Track and communicate information
Globally mobile employees with share-based incentives incur trailing tax liabilities. Remember, an employee may have an obligation to pay income taxes in each country he or she has lived during the life of a share-based award. It’s imperative that HR keep the SPA team apprised of all employees who are globally mobile, as well as their locations at the time of grant, vest and exercise. Ideally, the information is current before the taxable event. Finding out after the employee has moved, as in our scenario above, presents challenges. The SPA team may need to recreate the mobile employee’s history in the plan administration database in order to make the appropriate gain allocation. Payroll may also need to reinstate the individual on each relevant local payroll in order to apply the required withholding. This process is cumbersome and time-consuming if the employee has moved several times. If an employee’s mobility isn’t discovered until the point of taxation, settlement of the award is likely to be delayed until the applicable taxes can be withheld.
Tracking globally mobile employees is also important for expense allocation and may affect valuation inputs for a specific population. Here, too, learning of an employee’s relocation after the fact may mean post-period adjustments that aren’t fun for anybody. Moreover, there may be instances where a globally mobile employee is mistakenly deemed subject to, say, the French tax-qualified sub plan when in fact the individual has moved from France to Italy as a permanent transfer. Awards made while the individual was in France would indeed be qualified for French tax purposes and subject to all the rules for French tax-qualified plans (specifically, the holding periods and sale restrictions). But grants made to the individual upon permanent transfer to Italy likely would not be made under the French sub plan, so wouldn’t be subject to the same restrictions. Imagine having to rescind an award and grant another in its place that the employee may perceive as less favorable.
A process to identify mobile employees and track their movements is a must. The process should involve close coordination among the home country and local HR teams, the global mobility group (if there is one) and the SPA group. Schedule routine audits to be sure nobody falls through the cracks. Fixing a misstep can have a huge impact on everyone’s time and put a major strain on resources.
In the next part of the white paper, we’ll look at what your colleagues on the legal and finance teams need to know about the management of global equity plans. Read it now.