Transcript No Slide Title

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
[email protected]
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 Advantages
Stock Purchase Advantages
Ease of Administration/
Flexibility
Employee Makes Investment
Virtually Universal and
Well Recognized
No ISS Concerns
Participation Can Be Up
100%
Less Dilution
Vesting for Retention
More Share Ownership Likely
Automatic “Repricing”
STOCK OPTIONS VERSUS STOCK PURCHASE
Stock Option Drawbacks
Stock Purchase Drawbacks
Dilution
423 Design Inflexible
ISS Resistance
More Difficult
Administration
Underwater Options a
Disincentive
Lower Participation
Little Employee Share
Ownership
Withholding Issues Outside
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
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France
U. K.
Italy
Sweden
Norway
– Failure to Take Advantage of Local Tax Advantages
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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
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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 CountrySpecific 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
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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