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The Hottest Issues in Stock Compensation TodayNational Association of Stock Plan Professionals
Austin Chapter
1
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 office of any such law firm.
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)
Performance Awards – Here to StaySummary of Key Findings on Performance Plans (units, cash and shares)*
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)
‒ 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.
Recent Developments in Mobile Employee Taxation -- Ireland
‒ 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
Proposed Tax Reform in the US‒ Proposals related to equity compensation
No more deferred comp, everything would be taxed when no longer subject to substantial risk of forfeiture Could apply to stock options as well as full value awards Would accelerated/continued vesting upon retirement
become a thing of the past? 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) CFO once again a covered employee No exemption for performance-based compensation Would IRS take this opportunity to align treatment of
equity awards with the proposed requirements for health insurance providers?
Clawbacks‒ 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 U.S. Sarbanes-Oxley Act of 2002 (“SOX”) o U.S. Dodd–Frank Wall Street Reform and Consumer Protection
Act (“Dodd-Frank”) - July 2010 o 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)
‒ 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
– 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
Possible Solution #3Don’t issue shares until plan participant accepts the award
US tax issues / Code Section 409A
Code Section 409A requires document and operational compliance; failure to comply results in excise tax imposed on service providers/employees
Short-term deferral exception – RSU award must be paid within 2 ½ months following the end of the year in which the award vests
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
Possible Solution #4Include 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 short-term 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
How to cover tax if shares not issued?
May not be acceptable to accelerate taxable event without issuing shares
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)
Information on the key compliance issuesfor equity awards. It covers tax andsecurities, exchange control, labor anddata privacy issues in 50 countries.
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