International Equity Compensation The success of employee ownership in the United States has helped to fuel growing interest in the use of broad-based equity compensation plans around the world. Dozens of countries have established laws and regulations governing the operation of employee stock plans. Many of these laws specifically address the use of employee ownership within the context of the privatization of state-owned enterprises, but often they affect the general operation of employee stock plans, including plans established by multinational companies. Indeed, global equity plans are increasingly being established by public and private firms of all sizes that have international operations.
International equity plans can take several forms. One common approach is to issue stock options. Some companies make a one-time grant of a set number of options to each employee or grant equal numbers of options to employees on an annual basis. Others provide employees with options equal in value to a given percentage of pay each year or provide option awards for selected employees based on individual merit. One advantage of stock options is that they can be structured to avoid actual distribution of the shares, an approach that may be required in countries that restrict ownership of foreign securities or impose additional taxes on the ownership of stock in foreign companies.
Some multinational companies have successfully implemented stock purchase plans similar to Section 423 or 401(k) plans, though, as with stock options, the plan rules need to be modified to conform to local securities laws. In these plans, the plan custodian typically collects employee salary deferrals and makes periodic purchases of the company's stock on behalf of the employees.
Another common approach is to provide restricted stock grants to employees at overseas locations. The shares are held in trust on behalf of the employee until the restrictions lapse, at which time the employee can either receive the shares or request that the trustee sell the shares and distribute the sale proceeds to the employee.
Restricted stock units (RSUs) are increasingly used internationally due to the consistency and timing of their tax treatment . RSUs generally avoid the complications of securities filings in many countries, as the grants are not deemed "offerings" for the purposes of the country's relevant SEC rules.
Another approach to international equity plans is to create an "International ESOP" in a tax-free jurisdiction. In this scenario, each of the company's international subsidiaries is provided with an account within the trust and each participating employee has an individual account within the plan of the appropriate subsidiary. Then, based on their individual profitability, the subsidiary corporations either purchase shares of the parent corporation, or receive grants of stock from the parent and allocate those shares to the accounts of the participating employees by a pre-determined formula (usually a percent of salary). At termination of service, the ESOP trustee sells the employee's shares and makes a distribution of the cash proceeds to the employee. This has the advantage of alleviating securities registration concerns in most countries as well as avoiding certain country regulations restricting the ownership of shares in foreign corporations. The employee is simply taxed on the cash proceeds in accordance with the tax laws of the country where he or she resides. The repurchased shares are then reallocated to other employees within the ESOP.
When considering the establishment of an international equity plan, companies need to examine a number of important issues:
- Securities laws - Securities registration is usually required. Some countries' laws prohibit the ownership of shares in foreign corporations. An alternative approach in these jurisdictions is to provide employees with phantom shares or to provide employees with the cash value of the shares at the time of distribution rather than distributing the securities themselves.
- Plan design – Careful consideration needs to be given to a variety of factors including relative pay rates and cost of living differences among participating countries, the potential impact of the plan in terms of employment in some jurisdictions, and foreign exchange issues.
- Plan administration - Careful coordination with the stock plan administrators in each foreign subsidiary is necessary in order to process employee purchases and make allocations to the appropriate accounts. Currency conversion issues are frequently a key administrative concern.
- Taxation - Differing tax laws may make administration of a centrally managed plan difficult and require careful monitoring of changing tax law requirements.
- Communications - Language and cultural barriers should be given careful consideration in order to minimize difficulties.
For more detail about international equity compensation plans visit our Consulting Services section, or the Global Equity Organization.
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