equity in a global landscape shane smailes & michelle kassis pwc.com.au
TRANSCRIPT
Equity in a global landscapeShane Smailes & Michelle Kassis
pwc.com.au
PwC
1 The global landscape
2 Equity trends
Grants
Tax compliance and planning
Equity administration
What does this mean for you?
3 Going global?
Agenda
2
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The global landscape
13
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The global landscape
4
• 83% of CEOs expect to grow operations in South East Asia
• 59% of CEOs see emerging markets as more important than developed markets to their future
• More than half of CEOs are planning to move experienced employees from their home market to newer markets to circumvent skills shortages.
Source: 15th PwC Annual Global CEO Survey
Global growth
PwC
The global landscape (cont’d)
5
• 53% of CEOs see lack of key skills as a major challenge
• One in four CEOs say lack of talent has meant cancelling or delaying a strategic initiative
• 78% of CEOs are demanding a change to strategies for managing talent (The number one priority for CEOs).
Source: 15th PwC Annual Global CEO Survey
Skills shortages
PwC
The global landscape (cont’d)
6
• 71% of Millenials expect and want to do an overseas assignment during their career
• More than half of Millennials expect to have between two to five employers during their working lives (a quarter expecting to have more than six).
Source: Millennials at work – Reshaping the workplace
Millennials re-shaping workforce
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The global landscape (cont’d)
7
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Equity trends
8
2
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Equity trends
9
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Equity grant practices
10
2.1
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Equity grant practices
11
Key driver of equity compensation continues to be alignment of compensation strategy to business strategy.
However there was a notable shift in “addressing issues raised by the Board” which increased from 1% in 2009 to 9% in 2011.
There is a continuing decline in service based stock option awards. Performance based shares/units are now more popular than at any time in history. Restricted Stock and Restricted Stock Units are becoming the most common vehicle in virtually all industries and among companies based in every surveyed country.
PwC
Equity grant practices (cont’d)
12
20092011
60%
50%
40%
30%
20%
10%
0%Align Comp with
Business StrategyTo address
issues raised by the Board of
Directors
Int'lCoordinat
ion
Changes made – Other
Corp Governance
Issues
Options Out ofMoney
Dilution/IssuesRaised by ISS
Tax Issues AccountingIssues
Drivers of changes in equity comp
Market Trends
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Equity grant practices (cont’d)
13
Type of equity offered
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Performance-based Market-based
2009
2011
9% 9%
9% 6%
2009
2011
5% 7%
3%
2009
2011
7% 7%
3% 6%
2009
2011
33% 26%
34% 27%
2009
2011
23% 16%
23% 20%
2009
2011
28% 17%
10% 15%
Ph
anto
mS
tock
SA
R
Sto
ckS
ettl
edS
AR
RS
UR
SO
pti
on
s
2%
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Equity grant practices (cont’d)
14
Most frequently cited performance/market targets
35%
30%
25%
20%
15%
10%
5%
0%EPS Shareholder
ReturnReturn Revenue/
GrowthOther Stk Price/TSR
Relative to Peers
Cash Flow EBITDA Stk/Share Price
EBIT
2011 2009 2007
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Equity grant practices (cont’d)
15
Vesting periods100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3 years – cliff 3 years – graded 4 years – cliff 4 years – graded
Other
17% 15% 14% 15%
25%17% 16%
27%
9% 9%
11%
28%26%
8%
38%36%
34% 31%
12%12%
Options/SARs RS/RSU/Phantom Options/SARs RS/RSU/Phantom
Executives VPs/Mgr
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Equity grant practices (cont’d)
16
Reasons for shareholder dissatisfaction in equity plans70%
60%
50%
40%
30%
20%
10%
0%
Want MoreRestrictions in
Exec Comp
Want MoreControl Over
LTIs
Other Concernedabout Dilution
Want MoreLinks to CoPerformance
Plans TooGenerous
Want MoreControl Over
Risk
ConcernedAbout
Oversight
Want MorePredictability in Budgeting
Comp Expense2011 2009
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Tax compliance and planning
17
2.2
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Tax compliance and planning
18
Companies remain focused on achieving both local employee and company tax efficiency/savings and global compliance.
While the most challenging aspect of offering equity remains “compliance”, “communication” and “cross departmental coordination” also present significant challenges.
The most challenging tax compliance countries have proven to be China, the United Kingdom, the United States, France, India and Australia.
PwC
Tax compliance and planning (cont’d)
19
Most challenging aspects of offering equity80%
70%
60%
50%
40%
30%
20%
10%
0%
Compliance Administration Global GrantGuidelines
Communications Cross-countryCoordination
Cross-departmentalCoordination
Other
2011 2009
PwC
Tax compliance and planning (cont’d)
20
Companies audited in the last three years (as % of responses)40%
35%
30%
25%
20%
15%
10%
5%
0%
Germany UK France US Japan China Netherlands Singapore
2011 2009
Philippines South Africa South Korea Switzerland
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Tax compliance and planning (cont’d)
21
Countries with most challenging tax compliance
2009 2011
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
US
UK
Switzerland
Singapore
Russia
Philippines
Netherlands
Japan
Italy
Ireland
India
Hong Kong
Germany
France
China
Canada
Brazil
Belgium
Australia
Argentina
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Tax compliance and planning (cont’d)
22
Prevalence of internal compliance reviews
2011 2009 2007
60%
50%
40%
30%
20%
10%
0%
All (100%) Most (50% or more) Some (49% to 26%) A few (Less than 25%) None
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Tax compliance and planning (cont’d)
23
Frequency of internal compliance reviews70%
60%
50%
40%
30%
20%
10%
0%
Upon Implementation the plans
Annually Every 2 years OtherEvery 6 months or more frequently
2011 2009 2007
PwC
Tax compliance and planning (cont’d)
Recharge of plan costs
• Main driver behind charging back equity costs to foreign affiliates is to secure corporate tax deductions. This showed a significant increase from 23% in 2009 to 44% in 2011.
• 80% of participants indicated they have a recharge agreement in place – a drop of 14% from 2009 figures.
24
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Tax compliance and planning (cont’d)
25
Reasons to start charging back equity plan costs
2011 2009
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%To secure local tax deductions Both of the above To mitigate costs associated with
expensingOther
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Tax compliance and planning (cont’d)
26
If you charge back, what/when is the subsidiary charged30%
25%
20%
15%
10%
5%
0%Grant date fair value Spread/value at time of
settlementSpread minus grant date
fair valueConsulting and advisory
costs
at grant from grant to vest at settlement
Filing and reporting fees
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Equity administration
27
2.3
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Equity administration
• While the most challenging aspect of offering equity is “compliance” interestingly the most significant jumps were in “communications” which increased from 31% in 2009 to 48% in 2011 and “cross country
co-ordination” which increased from 30% in 2009 to 46% of participant in 2011.
• 39% of participants in 2011 delivered their award agreements via the administrator’s internet site compared to 25% in 2009.
• A notable increase in employees acknowledging receipt at grant via an electronic system hosted by the Company was seen from 9% in 2009 to 48% in 2011 – a gain of 39%.
• 65% of participants use an external stock plan administrator to store their equity data which is consistent with 2009. There was a drop in storing equity data “in-house using database application”.
• 35% of participants said their stock plan administration software was not adequate to meet their tax needs. An increase of 13% from 22% in 2009 to 35% in 2011.
28
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Equity administration (cont’d)
29
80%
70%
60%
50%
40%
30%
20%
10%
0%
Financial Services – Bank
Third PartyRecordkeeper
Transfer Agent/Registrar
Financial Services –Discount Brokerage
OtherFinancial Services – Full Service Brokerage
2011 2009 2007
Current primary service provider
PwC
Equity administration (cont’d)
30
Method of award agreement delivery45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Posted on theAdministrator’s
Internet Site
Sent by Email toEE's CompanyEmail Address
Mailed to EE'sHome Address
Mailed to EE'sWork Address
Other Posted on theCompany’s
Intranet Site
No AwardAgreementsDistributed
2011 2009 2007
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What does this mean for you?
31
2.4
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What does this mean for you?
32
• Between 2009 and 2011 there was a notable drop in companies offering service based stock options from 46% to 24%.
• Service based plans in Australia still remain the most prevalent when compared to performance and market based plans.
• In 2011, 67% of Australian companies offering a share purchase plan had participation levels of between 0% – 25% and 20% of companies had participation levels between 26% - 50%. When compared to 2009, 44% of companies had participation levels between 26% - 50% and 36% of companies had participation levels between 0% – 25%.
• The most common vesting condition in Australia remains continued employment of 3 – 4 years and is used by 45% of companies. Continued employment for 2 – 3 years comes in at 33%.
• 72% of companies surveyed had not considered the impact of payroll tax on equity plan awards in certain states.
Australia
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Going global?
33
3
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Going global?
Mob
ilit
y m
att
ers
Ow
ners
hipH
owW
hatW
hy
34
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Going global? (cont’d)
• Consider why you want to offer the plan internationally.
• What objective are you trying to achieve?
• What benefit do you want to provide?
Wh
y
35
PwC
Reasons for offering equity internationally
36
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
To create a uniformglobal equity/stock compensation benefit
To offer our employeesthe opportunity to
become shareholders
To match offers made bynon-local competitors
To match offers made bydomestic competitors
Other
2011 2009 2007
PwC
• Understanding the tax, regulatory and legal implications in the countries that you wish to offer equity is of paramount importance.
Going global? (cont’d)W
hat
37
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• How will you communicate the plan globally?
• Understand the limitations of your global systems – can your payroll handle equity awards in all locations?
• Can your share plan administrator deliver equity in the countries that you operate?
• Will you recharge plan costs/can you recharge costs?
Going global? (cont’d)H
ow
38
PwC
• Implementing a plan globally works best where there is central ownership of the administration of the plan. Where will this ownership sit?
• Who will monitor tax, legal and regulatory filings and ensure they are undertaken in a timely manner?
Going global? (cont’d)O
wn
ers
hip
39
PwC
• Where plans are implemented globally, it generally allows mobile employees to continue participating in the plan regardless of whether they move from one country to another.
• The movement of employees throughout the life of an award creates tax complexities as it can generate trailing tax liabilities long after an employee has left a location.
• Many of the tax obligations which arise are employer obligations – How will you track and deal with these liabilities?
Going global? (cont’d)M
ob
ilit
y m
att
ers
40
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Going global? (cont’d)
41
Methodology to track expatriates from grant to settlement
25%
20%
15%
10%
5%
0%
Excel Spreadsheet Mobility Department Other Stock PlanAdministration
("SPA") Software – "Snapshot"
Only
SPA Tracks HistoricMobility
Reconcile SPASoftware to
PayrollStubs
2011 2009
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Conclusion
42
4
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Presenters
43
Shane Smailes
PwC Partner
Melbourne
P: +61 3 8603 6097
Email: [email protected]
Michelle KassisPwC DirectorMelbourneP: +61 3 8603 5676Email: [email protected]
pwc.com.au
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