Issues Related to Global Executive Plans

Siobhan Hurley, PricewaterhouseCoopers LLP Steve Brown, Accenture

5 November 2001, NCEO Global Equity Compensation Forum PwC

Case Study Design and Implementation of Share Plans at Accenture

Agenda

• General background on Accenture and how Company determined its equity compensation philosophy • Discussion of country specific issues that Accenture faced as a result of equity compensation philosophy • Key regulatory issues that Accenture faced and how resolved

Accenture Background

• Large multi-national company was implementing equity plans for the first time in conjunction with IPO • Change in corporate structure generated a need for new compensation structure -- Transitioning from partnership to corporation • Highly mobile global workforce – – Operating in 46 countries 75,000 employees; 2,500 partners • IPO put a tight deadline on implementation • 2 key and distinct groups to satisfy: Executives (i.e.“partners”) and employees –

The Plans needed to offer maximum flexibility to satisfy both groups

Accenture Share Plans

• 3 Plans Implemented: – Stock Option Plan – – Employee Stock Purchase Plan Restricted Share Units (RSU’s) – Promise to deliver Accenture shares at no cost to employee at a specified future date – No voting or dividend rights until shares delivered

Accenture Objectives

• Implement all plans in all countries wherever legally possible • Encourage long-term ownership for partners • Celebrate the IPO and encourage ownership by employees • Flexibility to make plans attractive to executives as well as broader employee base

Accenture Plan Design

Stock Options: – Stock option grants limited to managers and above – – – One-time grants at IPO Possibility of future grants upon promotion or being hired Significant future grants anticipated upon promotion to “partner” ESPP: – – ESPP designed to offer broad, ongoing participation to employees Excludes partners Restricted Share Units: (RSU’s): – – – Generally one-time celebratory grants at IPO Designed to offer broad participation (Provided to all employees) Also provided to key executives (I.e. newly promoted, high performing partners)

Accenture Plan Design

Key Distinctions between Executives (“partners”) and employees: • Options: – 4 year vesting for employees – 5 year vesting for partners • RSU’s: – 100% vested for employees at IPO – – Share delivery at 18 and 36 months from IPO for employees Generally 5 year vesting for partners with Share deliver spread over 8 years

Plan Implementation

• Now that decision of which plans to offer and to whom had been made, Accenture needed to make this happen globally • Objective of providing flexibility and satisfying different groups necessitated creativity in some jurisdictions • Other jurisdictions posed regulatory problems

Netherlands – Stock Options

• Traditionally, tax is due at vesting of stock options • Recent legislation allows employees to choose to defer taxation until exercise • However, social tax is still due at vesting and possibility of any deemed discount to be taxed at vesting; corporate deduction can also be an issue • Some companies are seeking rulings to allow only full cashless exercise; • With ruling, Dutch tax authorities treat award as cash compensation, not under stock option rules; entire spread is taxed at exercise • Problem: reconciling desire of some employees to hold shares with administrative issues

Netherlands – Solution for Stock Options

• Decision: Offer employees a choice of Stock Option grants

Alternative A:

Standard grant with income and social tax at vesting

Alternative B:

Standard grant with choice under new rules to defer income tax until exercise

Alternative C:

Grant that allows for full cashless exercise only; all taxes now due at exercise/sale •

Chosen by 3 of 18 partners who received options

•

Chosen by 29 of 243 employees No employees or partners chose this alternative

•

Chosen by 15 of 18 partners who received options

•

Chosen by 214 of 243 employees

Netherlands – RSU’s

• RSUs would be taxed at time of RSU grant (generally IPO date), as they are fully vested at grant, rather than at receipt of actual shares • Broad-based nature of RSUs - tax at grant could make the awards a burden for the employees rather than something positive • Failure to present alternatives to employees could create problems with Works Council • Company wanted to make certain they could achieve their aim of allowing all employees to participate in IPO but keep the grant as flexible as possible

Netherlands – Solution for RSU’s

• Decision: Offer employees a choice of RSU grants

Alternative A:

Taxed at time of grant of RSU on FMV of shares with a discount factor

Alternative B:

Tax at time shares are delivered based on FMV on date of delivery. Requires vesting conditions and ability to convert shares to cash.

• •

Chosen by 0 partners Chosen by 250 of 838 employees

•

Chosen by 3 of 3 partners who received RSU’s

•

Chosen by 588 of 838 employees

Switzerland

• Generally, tax is due at grant • Taxation can be shifted to exercise if certain conditions are met: – – – Option life is greater than 10 years Vesting period is greater than 5 years Option cannot be objectively valued at grant

Switzerland -- Solution

• 2 plans offered -- employees have choice • Standard grant with 10 year life -- tax at grant • Amended grant with 10 year + 1 month life -- tax at exercise • Employees choose before grant • Allows employees with funds and ability to take risk the opportunity to pay tax at grant – One of 8 partners and 5 of 95 employees who received options chose tax at grant

Japan

• Securities filing requirements are complex and can be time consuming • Number and value of anticipated option grants upon IPO meant full securities filing (Form 7) would be necessary • Time involved in preparing and translating audited financial statements meant it was unlikely filing would be completed prior to IPO • Accenture was faced with the possibility that if grants may not be able to take advantage of IPO price

Japan -- Solution

• Establish a trust to which the options are granted —

Ninni Kumiai

(the NK) • Company grants options to the NK indicating optionee’s name and number of options • NK is viewed as single holder of options – full Form 7 not necessary • When NK is dissolved, options are distributed to optionees under original terms and conditions

Regulatory Issues Faced by Accenture

• Primarily exchange control issues, although securities regulations also were a factor • Post IPO implementation of ESPP meant more time to complete exchange control filings; not the case for securities filing in Japan • Accenture been successful in offering ESPP in “unusual” locations— Brazil, India, South Africa • Looking at possibilities for China and Russia

China

• Lack of regulations and responsible authority on stock plans means there are numerous discrepancies on what is permissible • Exchange controls are strict; previously thought to include ownership of foreign shares • Currently, it is believed ownership of shares is OK, but still difficult to remit funds • Accenture decided to proceed with implementation of options and RSUs; employees generally must do a sell to cover or cashless exercise • ESPP – Cash-based alternatives available

India

• Exchange control restrictions -- annual remittances greater than $20,000 require Reserve Bank of India (RBI) approval • All plans were extended to employees, but local entity must monitor compliance with $20,000 limit for ESPP • Generally, sell to cover and cashless exercise are necessary for options • In order to secure most favorable tax treatment, a change to the RSU plan was necessary – RSU recipients must pay a nominal purchase price when they receive the shares

India New Guidelines

• Exchange controls were not the only difficulty faced in India • Confusing guidelines published by the Securities and Exchange Board of India (SEBI) meant taxation of plans was unclear • Conflicting information made full implementation difficult —plans were rolled out, but caveated that tax treatment could change • New Central Government guidelines published October 5, 2001 • Clarified that plans of foreign parent companies are eligible for preferential tax treatment (tax at sale) – retroactive to April 2000

Brazil

• Exchange controls make implementation difficult • Remittance abroad of more than $20,000 per year requires Central Bank of Brazil (CBB) approval • Company can make remittances on behalf of employees below that amount, but must report details to the CBB • Funds remitted by employees for ESPP are tracked and monitored by the company to ensure that $20,000 annual limit is not exceeded

South Africa

• Exchange control restrictions make stock plans difficult to implement • Accenture opted to file for exchange control approval in order to extend stock plans to the fullest extent possible • Employees can participate in all 3 Accenture plans • Any remittance of funds as part of participation counts against employees lifetime investment allowance of RND 750,000 • All exercise methods available (exercise and hold, sell to cover, full same-day-sale) as long as investment allowance is respected

Closing Comments and Questions

• Strategy is important for global plans – need to understand what the company’s objectives are in order to make the best decisions when faced with country specific challenges • Companies may need to offer choices in some countries in order to provide the flexibility to satisfy both executives and broader employee population • There are alternatives and solutions for problems with exchange controls and securities filings