I had something in mind to bring to the forefront this week – the topic of monitoring your risk when it comes to global compliance for equity plans. I’d recently caught wind that one country has ramped up their tax audits – particularly related to equity plan incentives. Rather than do an ordinary run through of where we’re seeing more compliance audits and actions, I’m going to test your knowledge with a short quiz. Are you on top of the changing risk factors when it comes to global compliance? Ready?
Test Your Know-How of Global Risk Factors
1) Which country was recently the subject of a Global Alert titled: “People’s Republic of China (PRC) – Increased focus from tax authorities on equity awards”?
2) Which country recently enacted legislation requiring an allocation ratio not to exceed 5:1 for “free” shares issued under qualified plans? (For example, where one employee receives 100 free shares, no other employee may receive more than 500 free shares.)
3) Which country has a pending legislative bill that aims to provide specific tax requirements for treatment of share incentives for internationally mobile employees?
b. United States
c. United Kingdom
There is a common theme in all of the questions above: recent change. In all of these cases, there are things that have occurred, or things that are proposed that result in significant changes to how companies need to approach their equity incentives in these countries. By now, I think most companies engage in some form of a compliance review at some point in time (annually?). The question is whether a periodic review is enough to keep up with interim changes. I’m not a lawyer, but I’d venture to suggest that a periodic review of your global compliance is a good practice, but may need to be supplemented with interim monitoring and adjustments. There are simply too many global jurisdictions, too many differences amongst locales, and too many ongoing changes to leave things up to an annual review – particularly if you are issuing equity in multiple countries or notoriously compliance aggressive locations.
To address the specific questions in the quiz above – China has increased scrutiny and enforcement of reporting for equity plans in at least two jurisdictions. This includes audits. In France, new legislation has been adopted that now requires a company to have an allocation ratio when issuing “free” shares. The scope of this new ratio is not entirely clear, and some global advisers recommend a case-by-case approach until further information is available. In the United Kingdom, there is pending legislation that would require taxation of equity incentives realized by internationally mobile employees. While the rules are not final yet, there could be significant impact to individuals who have come to the UK with equity awards already in hand. The proposed legislation would subject those awards to UK income tax if an exercise (stock option) or vesting event (restricted stock) occurs on or after April 6, 2015.
The intent of today’s blog is to remind everyone that global compliance continues to be a challenge, and one that really requires a multi-pronged approach. Leaving risk assessment to an annual review of your plans and related compliance is probably not enough. Companies should consider engaging expert advisers, utilizing available means to keep on top of interim changes (the NASPP has a Global Stock Plans Portal that includes country-specific guides, matrices, alerts and newsletters from firms specializing in global compliance), and assembling an internal team or task force that monitors and guides the process for assessing risk and managing global compliance. The case in point being the above quiz – 3 jurisdictions, 3 entirely separate issues or changes – all of interest and concern to the companies granting or taxing equity in those locations. Local regulators are becoming more assertive in their compliance measures. It’s best to consult advisers and your task force to determine where the greatest risks to the company exist, and how those risk factors may change as a result of legislative or enforcement developments.
Quiz answers: 1) China; 2) France; 3) United Kingdom
As I mentioned last week, I’ve been touring the southwestern United States over the past two weeks. This week, I conclude the tour with a few pictures from last week’s Phoenix NASPP chapter meeting. Emily Cervino of Fidelity and I presented “Living on Easy Street: Innovative Ideas to Make Your Life Easier.”
Sara Shoaf of Solium and new president of the Phoenix chapter. Kudos to Sara and the rest of the chapter officers for hosting a great meeting.
Pam Ellis of Solium (and Western NASPP Regional Representative and member of the NASPP’s Executive Advisory Committee) and Laura Shields discuss the presentation handouts.
Tricia Bajaj of Microchip Technology and Janet Truog of PetSmart. Janet is the Treasurer of the Phoenix chapter.
Bucky Swift of Snell & Wilmer, Brian Stovall of Fidelity, and Kathryn Worth of LifeLock. Bucky is the industry advisor to the Phoenix chapter and gave a short update on current developments at the start of the meeting (a service he provides at all Phoenix chapter meetings). Brian is the NASPP regional representative for the South and is also a member of the NASPP’s Executive Advisory Committee.
Sarah Aber and Pete Schmidt of ON Semiconductor enjoy lunch before the presentation begins.
Christina Delgado of Schwab and Nathan O’Conner of Equity Methods. Nathan is doubling up his NASPP chapter involvement–he is an officer for both the Phoenix chapter and the NASPP’s new Las Vegas chapter.
The term “clawback” represents a concept that’s been around for a while and it’s fairly simple to grasp the basics. Essentially, a clawback is a policy that entitles a company to recoup all or a portion of stock option, bonuses and other incentives from top executives under certain conditions. The intent of these provisions is usually an attempt to influence the behavior of the executive – to encourage or deter them from certain actions. The Sarbanes-Oxley Act of 2002 and Dodd-Frank both contain provisions that cover clawbacks. Dodd- Frank mandated further expanded repayment provisions, and we are still waiting for the SEC to propose the rules and adopt them. Although final clawback rules are yet to be released, companies continue to evolve in their usage of these provisions. In April 2014, PwC released its Executive Compensation: Clawbacks – 2013 Proxy Disclosure Study, which analyzed clawback trends using proxy disclosures for Fortune 100 and other large companies from 2009 – 2012. I’ll recap some of the key highlights in today’s blog.
92% of companies have policies in place to recoup compensation if there’s a restatement of financial results. According to PwC, “of those 92%, 73% require evidence that that the employee caused or contributed to false or incorrect financial reporting”.
A restatement isn’t the only reason companies are recouping incentives – 84% of studied companies also cited misconduct, (including violation of a company’s code of conduct or ethics policies and criminal conviction) as a reason for triggering recoupment.
Newer forms of clawback policies are emerging – a common form including a trigger for excessive risk taking by executives. The existence of risk taking provisions varies greatly by industry. For example, in the banking industry, 70% of the studied companies have policies to recoup incentives based on excessive risk taking, while 0% of companies in the Pharma, Retail, Technology and Auto/Airlines industries had excessive risk triggers.
79% of companies reserved discretion to determine whether or not to enforce their clawback policies on a case-by-case basis.
In 86% of companies, both cash and stock are subject to recovery under clawback policies (the remaining 14% of companies are split down the middle – either they recover only cash (7%) or only stock (7%)).
90% of companies may recoup awards regardless of whether the awards have vested. 10% recoup only vested awards.
With the SEC yet to release their rule making in this area (though we expect some action in this area sometime in 2014), companies continue to evolve their policies on their own – often based on shareholder input or other drivers. We’re certainly likely to see some additional trends emerge once the final rules have been adopted.
I’m on the road: 13 days, 8 flights, 6 cities, 5 presentations, 219 slides, and 1 carry-on. So for today’s blog entry, I feature a few scenes from the Austin and Houston chapter meetings that I presented at.
June Anne Burke and Denise Glagau of Baker & McKenzie and Ken Lipscomb, the Austin Chapter president. June Anne and Denise co-presented with me on “The Hottest Topics in Stock Compensation Today” in Austin and then the three of us road-tripped to San Antonio to speak at the E*TRADE Directions conference. A big thank you to Ken for arranging the Austin chapter meeting to coincide with our travel schedule!
Gary Hamilton of My Equity Comp and Kimberly Steele of Apple. Gary is an officer of the Sacramento chapter and Kimberly is a board member of the Austin chapter and was previously president of the Phoenix chapter.
Gustavo Dalanhese of E*TRADE and a colleague. Gustavo is president of the NASPP’s new Salt Lake City chapter. The Austin meeting was a veritable who’s-who of NASPP chapter leadership!
Kevin Roberts of Morgan Stanley (and president of the Houston chapter), Erika Rivera of Morgan Stanley, and John Vander Voort of Morgan Stanley (and former president of the Houston chapter) pose with me for a picture. A big thank-you to Kevin for scheduling the meeting to accommodate my travel schedule and thanks to Erika for helping with the meeting setup. And thanks to John for the pre-meeting Starbucks!
Katrina Rene of Phillips 66, Dina Snow of Quanta Services, and Cheryl Bounds of Freeport-McMoRan Oil & Gas. If you haven’t noticed, there are a lot of oil and gas companies in Texas. After hopping around the state on a plane, I can also attest to the fact that Texas is a BIG state.
These lovely ladies told me they are the “Three D’s”: Doree Alacon-Sta Ana of CenterPoint Energy, Dinny Tan of INP, and Daphyne Clowers of CenterPoint Energy. Maybe they have a band on the side or maybe they just happened to sit at the same table and all have names that start with “D”? (I prefer the “band” theory.)
Just one NASPP chapter meeting this week: Emily Cervino of Fidelity and I will present “Living on Easy Street: Innovative Ideas to Make Your Life Easier” for the Phoenix chapter on Thursday, May 22. It’s going to be a lot of fun; I hope to see you there!
In last week’s blog, I covered some basic tips for keeping tabs on globally mobile employees. This is an area where companies are still struggling to figure out a streamlined method to track and appropriately tax their mobile populations. In working through last week’s post, I realized that I only had enough space to barely scratch the surface – there is simply a lot to talk about when it comes to mobility. I promised more this week, and in today’s blog I’ll venture into a couple of areas where companies may want to consider focusing attention or implementing procedures.
Audit the actions of local payrolls. The Stock Administration and Payroll departments are closely tied when it comes to withholding taxes and reporting to tax authorities about equity compensation transactions. When it comes to global populations, most companies have local payroll staff at the jurisdictional level. A typical process flow for a mobile employee’s equity award tax withholding may include a calculation of the tax due at the corporate (stock administration) level, and then supply of that information to the local payroll for withholding and remittance to the tax authorities. What happens after that handoff is where we want to focus. In an NASPP Quick Survey on Globally Mobile Employees (February 2013), 42.9% of respondents said that they do follow up with local Payroll to verify that the tax collected for mobile employees is actually deposited with the local tax authority. I’ll offer my kudos to those companies. However, the majority of companies still do not appear to follow up with the local Payroll in this regard. Oversight, particularly when it comes to tax and other compliance matters, is crucial. We can’t just assume just because a report was provided to local payroll personnel that everything happened perfectly from there. If you’re not following up after remitting data to Payroll (including global payrolls), it’s time to implement an audit that ensures proper withholding occurred, and was correctly remitted to the tax authorities.
Track Business Travelers. In the NASPP’s Globally Mobile Employees Quick Survey, only 14.4% of companies say they notify business travelers that the company may report and/or withhold in multiple jurisdictions. This number is reflective of feedback about business travelers across the survey board. As a category, they are the most unattended in terms of tax compliance, tax assistance, and tax equalization. One of the biggest challenges with business travelers is that it’s very hard to track their movements. They typically don’t change address and rely on a “home base” as their address of record. Often the only way to know someone has traveled is by their out of office notification or expense report. That may be one reason companies have limited their efforts with this population. However, as we know, complexity in monitoring a population is not a defense for non-compliance. I asked Marlene Zobayan of Rutlen Associates to chime in on whether or not companies should be putting more focus into tracking their business travelers. She had the following to say: “Each company should assess its exposure from non-compliance for business travelers. While states and countries are increasingly auditing payroll compliance for business travelers, some companies may have a low exposure while others have high risk. A Rutlen Associates survey conducted in September 2013 found that 78% of respondents were looking to increase conformity. As payroll compliance for business travelers becomes more common, tax authorities, even those in currently low enforcement locations, will likely expect a higher level of compliance from all companies.” This seems like an area where companies want to comply, but are struggling to figure out the mechanics. If you haven’t evaluated your business traveler population, I would recommend at least having the discussion around the size and risk factors related to this population with your mobility internal and external teams. I have a feeling we’ll be seeing more on this topic in the near future.
Mobility is certainly a large and complex set of topics within a topic. What’s important is that companies continue to evolve their practices to become more and more compliant with tax withholding and reporting across the board for these tricky populations.
Last week, I summarized trends in retirement provisions for stock awards from the NASPP’s 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP). It turns out that the topic of retirement is one of endless blog fodder, so this week I look at more trends in this area. This week’s data is from the NASPP’s March 2014 Quick Survey on Retirement Provisions.
The Quick Survey Results
Retirement Eligibility: According to the NASPP’s Quick Survey, most companies (61% of respondents) have both a minimum age and a minimum service requirement that must be met to retire. Another 21% require a combination of age plus years of service (e.g., age, when added to years of service , must equal at least 65).
Minimum Age: Where companies have a minimum age requirement to retire, for 81% of respondents, that age is somewhere between 50 and 60 years. For the majority (58% of the total respondents), that age is between 50 and 55 years.
Minimum Service: The most common minimum service requirement is ten years (57% of respondents); second most common is five years (29% of respondents). These two categories account for 86% of the total respondents, so if your company’s requirement is different, you are definitely a bit of an oddball (and even more of an oddball if your age requirement is outside of 50-60 years).
Age + Service: It’s a little harder to define a trend for companies that require a combination of age plus years of service. There is close to a tie between 61-65 (34% of respondents) and 66-70 (28%). But 71-75 is not that far behind, at 19% of respondents, and 50-60 is not that far behind that, at 11% of respondents. 76-85 was last, but still in the running, at 9% of respondents. So, do whatever you want here.
Minimum Time From Grant to Retirement: At the majority (68%) of respondents, an eligible employee could be granted an award today, retire next month, and receive the payout provided to retirees under the terms of the award. Where awards do have to be granted a specified period of time before retirement for the retirement provisions to apply, for 47% of respondents, that time period was 1 year (for another 19%, it was six months).
Non-Competes: 41% of respondents say that retirees are not subject to a non-compete agreement. 30% say that only retirees above a specified rank (e.g., executives), are subject to a non-compete.
The Same Strokes for Different Folks: Most companies are egalitarian in the application of their retirement provisions. 90% or more say that the same provisions apply to execs vs. other management or the rank-and-file and US vs. non-US employees.
Collecting FICA: When employees become eligible to retire, 73% of respondents rely on the rule of administrative convenience to delay collecting FICA to a subsequent date in the same calendar year (either alone or in combination with the lag method). Practices are evenly split between share withholding and withholding the taxes from employees’ wages or other compensation (41% of respondents in both cases).
Well, that’s probably about it for retirement provisions (at least until we conduct another survey). Next week I promise to have something new to talk about.