for Granting Employee Equity Around the World
Having a global staff is crucial for growth, but rewarding and retaining them through equity grants can be complicated. Here's how organizations can build flexible equity plans that grow alongside their business when they expand.
In the digital age, assembling the best team means looking beyond your own backyard. In fact, rapid technological changes have led all types of companies to search outside their home countries for talented employees who can support their domestic and international operations.
Competitive cash compensation has always been a main enticement, but companies are increasingly looking to another tool to help them attract top talent and keep staff motivated: equity awards.
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“Positions that require expertise around big data, the Internet of Things, sophisticated marketing and business strategies or emerging digital skills—these are part of the global talent pool that is in demand,” Stewart adds.
But, offering company stock to employees living in other countries brings its own set of challenges. Each region has a unique set of laws, tax regulations and other potential hurdles that businesses need to be aware of.
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Learn The Laws
of Different Lands
One major problem for companies is that they can’t rush ahead and offer equity compensation without first considering regional rules, Stewart says.
“There are countries that don’t allow their citizens to own securities of foreign private companies, for example,” she says. “And, some countries only allow ownership of shares of foreign companies after a lengthy approval process.”
That’s not all. Some countries may require employers to prepare a prospectus for any securities they include in a compensation package, which can be a major burden for companies, Stewart notes.
On the tax front, “exporting a tax-advantaged U.S. equity plan abroad may not work well,” Stewart says, “so businesses need to consider all the relevant details.” The requirements of U.S. tax law may conflict with another country’s regulations. In these scenarios, companies often consider a separate plan or sub-plan for foreign employees.
These potential challenges underscore the need for companies to do thorough research when granting equity outside the U.S., notes Howard Lewis, assistant vice president at Shareworks by Morgan Stanley. In some situations, a business may learn that foreign regulations make certain equity programs too costly to offer, he says. That’s where flexibility comes into play.
Depending on where it’s offered, each type of employee equity award comes with a unique set of potential advantages or disadvantages. The good news is that many jurisdictions offer a tax-advantaged way to offer equity to employees.
Incentive stock options (ISOs), for example, are a well-known, tax-favored compensation scheme because they offer tax advantages in the U.S., according to Stewart. But, outside the U.S., ISOs in many cases provide no real tax advantages for the employees or employer. On the other hand, local laws outside the U.S. may offer businesses the opportunity to lower their overall tax burden for equity awards by complying with local tax requirements.
For companies with a large number of employees outside of the home country, it can make sense to offer a different type of award, Stewart says. Take, for example, a private company in a country that doesn’t allow citizens to own stock in a foreign private company. It may want to attract talent by offering an equity-like incentive program that pays out a cash equivalent of the value-increase of the underlying equity.
This is another area in which businesses need to perform deep research, Lewis notes. With the right information and partners, it is often possible to offer equity without creating tax or other compliance headaches for the company or its employees.
An Employee-Equity World Tour
Depending on where your international employees live, offering them equity compensation can require very different approaches. Here are a few places where granting equity compensation requires a creative solution.
Equity plans are a great way to reward talent, but they carry tax implications that your business needs to be aware of before it grants shares, not after. In each region, the value and desirability of an equity plan will be different than it might be for U.S. employees.
In some jurisdictions employees may be asked to assume some of the company’s tax burden when accepting equity payment. Additionally in some countries, paying staff with equity can lead to a higher overall tax burden for the employer.
Another key question that businesses need to consider is when their employees will be taxed for being part of the equity plan, Lewis says. Here’s an example that shows why timing is important: For restricted share plans, you need to know if the employee’s home country will tax the shares at the time of the grant. If that’s the case, recipients may have to pay out of pocket for shares before they vest, which can make this type of equity award less appealing to employees. A restricted share award may be a preferable alternative as it is taxed at vesting (and not at grant in most jurisdictions.
Find a Local Guide
So, how do you look at all the countries where you have employees and prospective employees and decide if equity grants make sense for your organization and your people?
Global Intelligence Launch Manager
Start by exploring the Shareworks Global Intelligence Launch Manager. Companies can use it to examine tax and regulatory information related to employee-equity plans in more than 170 countries.
Global Intelligence Database
Next, companies should consider working with a local expert who can help the business translate its equity plan and make sure it adheres to country-specific rules.
Bringing Teams Together
Granting equity to employees in other countries requires coordination between multiple groups in a company. Here's how they can work together.
Once a company creates the optimal plan, it still has to actually grant the equity, which requires coordination between business units.
Before granting equity to employees in other countries, businesses should make sure that their tax, finance, legal, stock administration and payroll departments are prepared to handle the requirements of each grant. Once the plan is in place, leaders should schedule regular meetings to keep everyone on the same page. Lewis recommends holding check-ins three months before each grant cycle.
Even for large firms, it can be a lot to manage, which is why small and mid-sized companies commonly outsource the related legal, finance and accounting work, Lewis says. Given the complexity of issuing equity awards, companies should still consider engaging a law or accounting firm, to the extent that they do not have in-house expertise. Stewart points to Shareworks’ Tax Mobility solution as a tool that companies can use to administer international equity programs and seamlessly tweak them as business needs and regulatory requirements evolve. Companies can also use the Shareworks Global Intelligence tool to examine tax and regulatory information related to employee-equity plans in more than 170 countries.
Conclusion: The Fine-Tuning That
Wins Global Talent
No matter what business you’re in, success depends on attracting, retaining and motivating the best people. In today’s global marketplace, those talented people could live down the street or on the other end of the globe.
It’s a new world for businesses to navigate, but there are key tools, professionals and support services that can help. Shareworks Global Intelligence software database and a network of law firms around the world can assist companies with offering and managing equity. Providing an equity plan that works for employees as they move from place to place can help you build the right team and grow your business.
Shareworks by Morgan Stanley: Helping your company build a culture of ownership.
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