Transcript www.naspp.com

The Hottest Issues in Stock
Compensation Today
National Association of Stock Plan Professionals
Austin Chapter
Barbara Baksa, NASPP
June Anne Burke, Baker & McKenzie LLP
Denise Glagau, Baker & McKenzie LLP
May 13, 2014
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology
used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an
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© 2014 Baker & McKenzie LLP
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Presenters
Barbara Baksa | NASPP
(510) 493-7599
[email protected]
June Anne Burke | Baker & McKenzie LLP
(212) 626-4371
[email protected]
Denise Glagau | Baker & McKenzie LLP
(415) 576-3067
[email protected]
© 2014 Baker & McKenzie LLP
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Agenda
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Performance Awards
Tax Developments
 Mobile Employee Taxation
 Tax Reform in the US
 Increase in Tax Reporting Obligations
Clawbacks / Forfeitures
Data Privacy
Grant Acceptance
CEO Pay Ratio Disclosure
© 2014 Baker & McKenzie LLP
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Performance Awards
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The Rise of Performance Awards

Performance award usage began increasing in the mid 2000s as a result
of market volatility and changes in accounting practices, and has
accelerated in prevalence as a result of ISS, say on pay, and
shareholder expectations for pay and performance
Source: NASPP Stock Plan Design Survey (2004 – 2013, co-sponsored by Deloitte Consulting LLP)
© 2014 Baker & McKenzie LLP
Performance Awards – Here to Stay
Summary of Key Findings on Performance Plans (units, cash and shares)*
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Prevalence: usage of performance awards outpaces stock options and
rivals time-based awards for senior management and above
Eligibility: median minimum salary for eligibility for performance awards is
$139,200 (up from $120,000 in 2010)
Grant frequency: annual grants used by majority of companies
Vesting schedule: 69% of companies who grant performance awards paid
out in stock and 72% of companies who grant performance awards paid out
in cash have a three-year performance period
Dividends: For performance awards paid out in stock, 62% pay dividends
on the awards. The majority (80%) pay out the dividends only when the
underlying award is paid out (half of these respondents pay the dividends in
cash and half reinvest them in additional shares)
Source: NASPP 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
© 2014 Baker & McKenzie LLP
Performance Awards – Here to Stay
Types of Metrics
Number of Metrics Used
Prevalence of Specified Metrics
© 2014 Baker & McKenzie LLP
Source: NASPP 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
Why is This Such an Important Trend?
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Performance plans have been rising each year, and are now
passing the tipping point of 50% of a CEO’s LTI
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As performance plans take up more of the pay program, it is
increasingly important to design them carefully
© 2014 Baker & McKenzie LLP
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Performance Award Checklist / Best Practices
1. Establishing Plan /
Program
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Board/Compensation Committee adoption
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Shareholder approval (Code Section 162(m)
considerations)
2. Determining
Grantees
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If executive subject to Code Section 162(m)
(or could be), then ensure satisfaction of
requirements
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VPs and above? All employees? In the US
vs. outside?
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Most common vehicles are RSUs and cash,
but RSA and options are possibilities
3. Determining Award
Type / Shares
© 2014 Baker & McKenzie LLP
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Performance Award Checklist / Best Practices
4. Performance When
established?
Targets /
Performance
Periods
© 2014 Baker & McKenzie LLP
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Before grant
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Before or after performance period begins
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Code Section 162(m) requirements
Number of shares per award
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Fixed (easier to administer/better outside US)
Target
considerations
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Objective vs. Subjective (Code Section
162(m) requirements)
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Market vs. Performance conditions (both?)
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Reference Measure (external (peer group,
indexes) vs. internal)
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Single Measure vs. Multiple Measures
(weighted/matrix)
Varies based on level of performance targets
attained (more difficult to administer but
motivates performance?)
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Performance Award Checklist / Best Practices
4. Performance
Targets /
Performance
Periods
Performance
Period
Attainment of
target
Result if obtained
© 2014 Baker & McKenzie LLP
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Single period vs. Overlapping
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Calendar/Fiscal vs. Event Driven
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Start date/duration
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ISS considerations
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Typically a minimum 1 year performance
period
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Who decides? Certification under Code
Section 162(m)
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Adjustments (What circumstances? Only
downward?)
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Vest (no longer subject to risk of forfeiture)
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Immediate Pay Out
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Additional service period requirements
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Performance Award Checklist / Best Practices
5. Termination of
service
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Payout at target vs. Maximum number of shares
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Pro-rate based on service during period
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Triggers….
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Death/Disability/Lay Offs or Redundancy
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Retirement
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Termination/Change of Status
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Change In Control
6. Dividends /
Dividend
equivalents
7. Tax consequences
/ withholdings
8. Disclosure
requirements
© 2014 Baker & McKenzie LLP
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Tax Developments
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Mobile Employee Taxation
Mobile Employee Dilemma
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Employee typically taxed on worldwide income in state and country
of “tax residence”
 e.g., entire gain at RSU vesting
Also taxed on “source” basis where income was earned
 e.g., all states/countries of employment during RSU vesting
period
Extra complexity for US transferees – citizens and greencard-holders
subject to US federal tax on worldwide income
 Tax residency in most countries based on time spent in country,
intent to reside indefinitely, ownership of real estate, etc.
Social insurance rules often do not mirror tax rules

May depend upon recharges, role of local employer, whether
employee remains on home country social system, etc.
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© 2014 Baker & McKenzie LLP
Mobile Employee Dilemma
Transfer
Transfer
Country A
Country B
Grant
Vesting Period
Country C
Vest Date
RSU
Gain
• Source Taxation?
• 100% as grant location?
• Any tax withholding or
reporting?
© 2014 Baker & McKenzie LLP
• Source Taxation?
• Any Exemptions –how long
in Country B?
• Any tax withholding or
reporting?
• 100% Resident Tax?
• Any tax withholding or
reporting?
• Any double withholding relief?
• US citizen or green card?
• Social taxes?
Mobile Employee Dilemma
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Income taxes and social insurance may be due in multiple countries
on different amounts and at different times
Double taxation of same income may occur
Tax treaties/totalization agreements/foreign tax credits may apply to
avoid or reduce double taxation – but can be tricky to apply
Special exemptions should be considered to potentially avoid tax
Timing of employee movement or grant of award may increase or
decrease tax amounts due
Employee movement can be difficult to control and track
** Heightened attention to mobile employees from tax authorities
around the world as countries looking for tax revenue **
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© 2014 Baker & McKenzie LLP
Recent Developments in Mobile Employee
Taxation -- Ireland
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Ireland taxes RSUs on an “all in/all out” basis
 If resident in Ireland at vesting, all gain is taxed
without apportionment
 If not resident in Ireland at vesting, no gain is
taxed in Ireland
Tax credit available if a double tax treaty is in effect
For tax years beginning January 1, 2013 and after,
“real time” tax credit where credit for foreign tax paid
through PAYE
 The employer must satisfy certain reporting
requirements
© 2014 Baker & McKenzie LLP
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Recent Developments in Mobile Employee
Taxation -- Switzerland
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The Swiss Social Security Administration issued
guidance in November 2013 on new rules regarding
Swiss social security taxation in mobile employee
situations
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The new rules align Swiss social security with Swiss
income tax in mobile employee situations
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Effective for taxable events occurring on or after
January 1, 2013
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Because guidance was late and not well
publicized, the authorities may be willing to
permit companies to implement for 2014 forward
© 2014 Baker & McKenzie LLP
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Recent Developments in Mobile Employee
Taxation -- Switzerland
Some exceptions apply:
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If employee subject to social taxes in home country
under a social security treaty, e.g., social security
totalization agreement, Swiss social security will not
apply
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If employee subject to tax in another country that
imposes social taxes without proration, Swiss social
security will be determined on a case-by-case basis
RECOMMENDED ACTION:
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Review method used for transfer situations involving
Switzerland
© 2014 Baker & McKenzie LLP
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Recent Developments in Mobile Employee
Taxation -- United Kingdom
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Finance Act 2014 harmonizes tax rules for mobile employees
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Options and RSUs taxed in the same way, generally
based on portion of vesting period worked in UK
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Eliminates exception to UK tax for options granted outside
UK without link to UK employment
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Effective for grants from September 1, 2014
New statutory residence test
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Considers number of days spent physically in the UK and
"connecting factors".
If less than 16 days in the UK in the tax year, not resident,
and one who spends 183 days or more in the UK in a tax
year will always be resident
Sliding scale for presence more than 16 days and less
than 183 days
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© 2014 Baker & McKenzie LLP
Tax Reform in the US
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Proposed Tax Reform in the US
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Proposal for broad tax reform released by Chairman of the
House Ways and Means Committee Dave Camp
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Income tax brackets reduced from seven to three
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What would happen to the supplemental flat rate?
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Preferential tax rates for long-term capital gains and
qualified dividends would be replaced with 40%
income deduction
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AMT eliminated
Likelihood of full enactment seems remote,
but parts of the legislation may become law
Listen to the NASPP’s podcast interview with Bill Dunn.
Search for “NASPP” in iTunes and download episode 5.
© 2014 Baker & McKenzie LLP
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Proposed Tax Reform in the US
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Proposals related to equity compensation
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No more deferred comp, everything would be taxed when
no longer subject to substantial risk of forfeiture
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Could apply to stock options as well as full value
awards
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Would accelerated/continued vesting upon retirement
become a thing of the past?
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Currently approximately 50% of companies provide
some sort of automatic payout to retirees
Or would this further push companies towards
performance-based awards?
Overhaul of Section 162(m)
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CFO once again a covered employee
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No exemption for performance-based compensation
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Would IRS take this opportunity to align treatment of
equity awards with the proposed requirements for
© 2014 Baker & McKenzie LLP
health insurance providers?
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Increase in Tax Reporting
Obligations
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Increased Tax Reporting Obligations
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Many countries have implemented foreign asset / foreign account
tax reporting requirements
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Belgium
Canada
France
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India
Japan
Korea
Spain
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U.S.
Varying thresholds apply
May impact awards, shares and/or sale proceeds
© 2014 Baker & McKenzie LLP
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Clawbacks / Forfeitures
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Clawbacks
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A clawback requires an award recipient to re-pay benefits
received pursuant to an award (e.g., shares or sale proceeds)
The purpose of clawbacks include:
 Promoting good behavior
 Punishing bad behavior
 Protecting the company’s business and trade secrets
 Complying with applicable laws
o
o
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U.S. Sarbanes-Oxley Act of 2002 (“SOX”)
U.S. Dodd–Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank”) - July 2010
Outside the U.S., most statutory clawbacks apply only to
financial institutions (e.g., EU Capital Requirements Directive
or CRD-IV, Hong Kong Guidelines on Sound Remuneration
System, Singapore FSB Principles for Sound Compensation
Practices)
© 2014 Baker & McKenzie LLP
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Forfeitures
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A forfeiture requires an award recipient to forfeit an award,
vested and/or unvested, that has not yet been paid
Serves similar purpose as a clawback, but there may be
differences in enforceability
© 2014 Baker & McKenzie LLP
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Clawbacks on the Rise
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60% of companies indicate their grants are subject to a clawback provision
(an 88% increase since 2010)
Employees that are most frequently
subject to clawback provisions:
Top three most common triggers:
© 2014 Baker & McKenzie LLP
Source: NASPP 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
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Effective Clawback / Forfeiture Provisions
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Clearly define scope
Distinguish between vested and unvested awards
Provide for ability to waive or modify discretionary clawback /
forfeiture if necessary to comply with local laws
Even if unenforceable, may decide to leave clawback / forfeiture
provision in award agreement as deterrent (generally fine, but
some exceptions, e.g., California in the case of a clawback
based on a non-compete)
Select US law as governing law, if possible
Require employees to affirmatively accept terms; consider
translations
Include appropriate labor law disclaimers in award agreements
© 2014 Baker & McKenzie LLP
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Final Word on Clawbacks / Forfeitures
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Obtain legal advice prior to any enforcement attempt
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Civil and/or criminal penalties may apply for such attempt, e.g.,
France
Clawback applied to current employees may provide basis for
constructive termination claim
Consult with auditors before implementing forfeiture/clawback
provisions
Consider a separate, designated brokerage account for holding
shares subject to forfeiture/clawback provisions
Designing clawback/forfeiture provisions should not be a standalone exercise
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Evaluate what your peer group companies are doing/considering and
incorporate the clawback/forfeiture provisions in the overall executive
compensation program design
© 2014 Baker & McKenzie LLP
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Data Privacy
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Australia –
New Data Privacy Legislation
– New data privacy law, Australian Privacy Principles
(“APP”), took effect on March 12, 2014
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APP regulate the handling of personal information by both
businesses and Australian government agencies
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Replaces existing data protection principles to strengthen
compliance
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Penalties of up to $A1.7 million for corporations
RECOMMENDED ACTION:
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Stay tuned for further developments
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© 2014 Baker & McKenzie LLP
Malaysia –
New Data Privacy Legislation
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New data privacy legislation into force on November,
15, 2013
 Participant consent required for use and transfer of
data
 Notification must comply with certain minimum
disclosure requirements
 The notice must be provided in both the
national language of Malaysia and in English
RECOMMENDED ACTION:
– Obtain separate consent
– Modify country addendum language and include
consent award agreement language in addendum
© 2014 Baker & McKenzie LLP
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South Africa–
New Data Privacy Legislation
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The Protection of Personal Information Bill ("POPI") signed into
law November 26, 2013
 The Act sets out requirements for processing of personal data,
including eight "core information-processing" principles and
the founding of an independent information-protection
Regulator
 Will significantly impact the way in which organizations collect,
store, process and disseminate information
 Impact on incentive awards is not yet clear
RECOMMENDED ACTION:
 Stay tuned!
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© 2014 Baker & McKenzie LLP
Grant Acceptance
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Grant Acceptance —
Particular Relevance for RSUs
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For options, acceptance of award can be built into the exercise
process; participants must take affirmative action to exercise
options
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No participant action is required when RSUs vest
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Therefore, there is no built-in mechanism in an RSU award that
forces the participant to accept the award prior to the vesting date
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This same issue also impacts restricted stock awards and
performance units/shares
© 2014 Baker & McKenzie LLP
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Grant Acceptance -- Why is it Important?
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Award agreement contains terms and conditions that protect the
company in case of disputes
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Award Agreement may also include other provisions that are
beneficial to the company
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e.g., tax withholding consent, vested rights disclaimer, data
privacy consent, governing law/venue provision
e.g., restrictive covenants such as non-competes and nonsolicits
Important that plan participants affirmatively agree to those terms
and conditions so they are more likely to be enforceable
© 2014 Baker & McKenzie LLP
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Possible Solution #1
Cancel the award if not accepted by first vesting date
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Accounting Issues
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Non-US tax issues
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Expense and share counts would be disclosed from grant date
through the first vest date until the award is forfeited
If tax due at grant, may not be able to recoup despite
cancellation (e.g., France)
Consider communications/employee relations issues
© 2014 Baker & McKenzie LLP
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Possible Solution #2
No new grants to participant if he/she fails to accept award within
timeframe or at all
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Hybrid of Solution #1
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Does not rectify the original grant issues
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Accounting Issues?
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No tax issues
–
Communications/employee relations issues
© 2014 Baker & McKenzie LLP
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Possible Solution #3
Don’t issue shares until plan participant accepts the award
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US tax issues / Code Section 409A
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Code Section 409A requires document and operational
compliance; failure to comply results in excise tax imposed
on service providers/employees
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Short-term deferral exception – RSU award must be paid
within 2 ½ months following the end of the year in which the
award vests
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Late payment exception – later of the last day of the
calendar year in which the payment is scheduled or 2 ½
months following the originally scheduled payment date
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Other exceptions; no legally binding right
FICA due on vesting even if shares not issued
© 2014 Baker & McKenzie LLP
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Possible Solution #3 (cont’d)
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No accounting issues
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Non-US tax issues
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In several countries, tax due at vesting even if shares not issued
(e.g., Australia)
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Problem: how to cover tax if shares not issued?
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Issue sufficient number of shares to cover tax
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Withhold from salary
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Administratively cumbersome
© 2014 Baker & McKenzie LLP
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Possible Solution #4
Include award in income at vesting but delay release
of shares until acceptance
‒No accounting issues
‒US tax issues

Code Section 409A requires compliance with the shortterm deferral rule or payment date must be determined
at time of grant – to avoid Code Section 409A violation,
withhold and report income (and social insurance tax) on
vesting date
‒Global tax issues
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How to cover tax if shares not issued?
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May not be acceptable to accelerate taxable event
without issuing shares
© 2014 Baker & McKenzie LLP
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Possible Solution #5
Issue shares at vesting but restrict sale/transfer of shares until
acceptance
‒Accounting issues
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No issues (if communicated in Plan or Grant Agreement) – share &
sale restrictions for other reasons typically result in a discounted fair
value
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Non-US tax issues
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Tax only due when restrictions lapse (e.g., Australia)
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Reduced taxable amount to reflect restrictions (e.g., Switzerland)
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Dual tax events: tax at vesting/issuance and upon lapse of
restrictions (e.g., United Kingdom)
© 2014 Baker & McKenzie LLP
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Possible Solution #6
Try to obtain acceptance but issue shares on the vesting date even if
not obtained
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Administratively cumbersome to chase employees
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No accounting issues
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Enforceability of award provisions may be limited
 For example, restrictive covenants and entitlement provisions
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Less protection in case of disputes
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Authority to withhold shares (or sell to cover) for income and social
insurance tax withholding may be questionable
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No authority to transfer employee personal data from certain countries,
unless consent obtained separately (e.g., in equity side/offer letter)
© 2014 Baker & McKenzie LLP
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Possible Solution #7
Implied or negative acceptance
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No accounting issues
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Enforceability of award provisions may be limited
 For example, restrictive covenants and entitlement provisions
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Less protection in case of disputes
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Authority to withhold shares (or sell to cover) for income and social
insurance tax withholding may be questionable
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No authority to transfer employee personal data from certain
countries, unless consent obtained separately (e.g., in equity
side/offer letter)
© 2014 Baker & McKenzie LLP
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Possible Solution #8
Require acceptance of standard terms prior to making grant
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No accounting issues
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Administratively cumbersome (especially if broad-based grants)
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Non-US issue:
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May lead to entitlement issues if grant not made
© 2014 Baker & McKenzie LLP
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Recap
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One-size fits all approach may not be the best option
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Consider using different solutions in different jurisdictions or for
different groups of participants
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When considering any solution consider: tax, accounting, labor
law and data privacy issues – as well as company profile
© 2014 Baker & McKenzie LLP
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Common Practices
Do you require employees to
accept awards?
If yes, what action do you take if
awards aren’t accepted before
vesting?
Pay out anyway, 2%
Follow up, 52%
No, 28%
Other, 72%
No action, 2%
Cancel award, 16%
Other, 2%
Source: May 2011 NASPP Quick Survey on Restricted Stock and Units
© 2014 Baker & McKenzie LLP
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CEO Pay Ratio Disclosure
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CEO Pay Ratio Disclosure
‒ Requires public companies to disclose ratio of CEO
pay to median employee pay
‒ Proposed regs issued last year, final regs expected
this year
‒ Unclear what, if any, value investors will place on the
disclosure

Media, however, is likely to be all over it

Legislation already proposed in CA to impose an
additional corporate tax based on the ratio (using a
different calculation than the SEC’s calculation,
however)
© 2014 Baker & McKenzie LLP
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CEO Pay Ratio Disclosure
‒ Simple in theory, difficult in practice

Select median employee of all individuals employed as
of last day of fiscal year, including:
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Median employee based on consistent definition of pay
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Both US and non-US employees, part-time employees,
seasonal employees, if employed at end of fiscal year
No cost of living or other adjustments to pay, except that
pay may be annualized for newly hired employees
Median employee’s pay the computed based on definition
of compensation for SCT to calculate the ratio
Statistical sampling permissible to determine median
employee
© 2014 Baker & McKenzie LLP
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CEO Pay Ratio Disclosure
‒ Action to take now

Start looking at how your company will perform this
calculation
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How to identify employees
Definition of compensation that is consistent for both US
and non-US employees
Statistical sampling
Get on the team

© 2014 Baker & McKenzie LLP
Stock is a big component of compensation; make sure
stock plan admin is part of the team looking at this issue
for your company
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Global Equity Matrix App
Information on the key compliance issues
for equity awards. It covers tax and
securities, exchange control, labor and
data privacy issues in 50 countries.
Available for free on your iPhone, iPad or
Android smartphone
More at www.bakermckenzie.com/GESAPP
© 2014 Baker & McKenzie LLP
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Questions?
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