© 2014 baker & mckenzie llp instructions how to apply a slide layout go to the home tab and...
TRANSCRIPT
© 2014 Baker & McKenzie LLP
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.
© 2014 Baker & McKenzie LLP
Presenters
Barbara Baksa | NASPP(510) 493-7599
June Anne Burke | Baker & McKenzie LLP(212) 626-4371
Denise Glagau | Baker & McKenzie LLP(415) 576-3067
2
© 2014 Baker & McKenzie LLP 3
Agenda
‒ 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
Performance Awards4
© 2014 Baker & McKenzie LLP
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 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)
© 2014 Baker & McKenzie LLP
Performance Awards – Here to Stay
Number of Metrics Used
Types of Metrics
Prevalence of Specified Metrics
Source: NASPP 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
© 2014 Baker & McKenzie LLP
Why is This Such an Important Trend? Performance plans have been rising each year, and are now
passing the tipping point of 50% of a CEO’s LTI
As performance plans take up more of the pay program, it is increasingly important to design them carefully
8
© 2014 Baker & McKenzie LLP 9
Performance Award Checklist / Best Practices
1. Establishing Plan / Program
- Board/Compensation Committee adoption
- Shareholder approval (Code Section 162(m) considerations)
2. Determining Grantees
- If executive subject to Code Section 162(m) (or could be), then ensure satisfaction of requirements
- VPs and above? All employees? In the US vs. outside?
3. Determining Award Type / Shares
- Most common vehicles are RSUs and cash, but RSA and options are possibilities
© 2014 Baker & McKenzie LLP 10
Performance Award Checklist / Best Practices
4. Performance Targets /Performance Periods
When established?
- Before grant
- Before or after performance period begins
- Code Section 162(m) requirements
Number of shares per award
- Fixed (easier to administer/better outside US)
- Varies based on level of performance targets attained (more difficult to administer but motivates performance?)
Target considerations
- Objective vs. Subjective (Code Section 162(m) requirements)
- Market vs. Performance conditions (both?)
- Reference Measure (external (peer group, indexes) vs. internal)
- Single Measure vs. Multiple Measures (weighted/matrix)
© 2014 Baker & McKenzie LLP 11
Performance Award Checklist / Best Practices
4. Performance Targets /Performance Periods
Performance Period
- Single period vs. Overlapping
- Calendar/Fiscal vs. Event Driven
- Start date/duration
- ISS considerations
- Typically a minimum 1 year performance period
Attainment of target
- Who decides? Certification under Code Section 162(m)
- Adjustments (What circumstances? Only downward?)
Result if obtained - Vest (no longer subject to risk of forfeiture)
- Immediate Pay Out
- Additional service period requirements
© 2014 Baker & McKenzie LLP 12
Performance Award Checklist / Best Practices
5. Termination of service
- Payout at target vs. Maximum number of shares
- Pro-rate based on service during period
- Triggers….
- Death/Disability/Lay Offs or Redundancy
- Retirement
- Termination/Change of Status
- Change In Control
6. Dividends / Dividend equivalents
7. Tax consequences / withholdings
8. Disclosure requirements
Tax Developments13
Mobile Employee Taxation
© 2014 Baker & McKenzie LLP
Mobile Employee Dilemma
‒ 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.
15
© 2014 Baker & McKenzie LLP
Mobile Employee Dilemma
Country AGrant
Country BVesting Period
Country CVest Date
•Source Taxation?•100% as grant location?•Any tax withholding or reporting?
• 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?
Transfer Transfer
RSU Gain
© 2014 Baker & McKenzie LLP
Mobile Employee Dilemma‒ 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 **
17
© 2014 Baker & McKenzie LLP
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
requirements
18
© 2014 Baker & McKenzie LLP
Recent Developments in Mobile Employee Taxation -- Switzerland‒ The Swiss Social Security Administration issued
guidance in November 2013 on new rules regarding Swiss social security taxation in mobile employee situations
‒ The new rules align Swiss social security with Swiss income tax in mobile employee situations
‒ Effective for taxable events occurring on or after January 1, 2013
Because guidance was late and not well publicized, the authorities may be willing to permit companies to implement for 2014 forward
19
© 2014 Baker & McKenzie LLP
Recent Developments in Mobile Employee Taxation -- SwitzerlandSome exceptions apply:
‒ 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
‒ 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:
‒Review method used for transfer situations involving
Switzerland
20
© 2014 Baker & McKenzie LLP
Recent Developments in Mobile Employee Taxation -- United Kingdom‒ Finance Act 2014 harmonizes tax rules for mobile employees
Options and RSUs taxed in the same way, generally based on portion of vesting period worked in UK
Eliminates exception to UK tax for options granted outside UK without link to UK employment
Effective for grants from September 1, 2014
T New statutory residence test
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
21
Tax Reform in the US22
© 2014 Baker & McKenzie LLP
Proposed Tax Reform in the US
‒ Proposal for broad tax reform released by Chairman of the House Ways and Means Committee Dave Camp Income tax brackets reduced from seven to three
What would happen to the supplemental flat rate? Preferential tax rates for long-term capital gains and
qualified dividends would be replaced with 40% income deduction
AMT eliminated
‒ Likelihood of full enactment seems remote, but parts of the legislation may become law
23
Listen to the NASPP’s podcast interview with Bill Dunn. Search for “NASPP” in iTunes and download episode 5.
© 2014 Baker & McKenzie LLP
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?
24
Increase in Tax Reporting Obligations
25
© 2014 Baker & McKenzie LLP
Increased Tax Reporting Obligations‒ Many countries have implemented foreign asset / foreign account
tax reporting requirements Belgium Canada France India Japan Korea Spain U.S.
‒ Varying thresholds apply
‒ May impact awards, shares and/or sale proceeds
26
Clawbacks / Forfeitures27
© 2014 Baker & McKenzie LLP 28
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)
© 2014 Baker & McKenzie LLP 29
Forfeitures‒ 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 30
Clawbacks on the Rise
‒ 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:
Source: NASPP 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
© 2014 Baker & McKenzie LLP 31
Effective Clawback / Forfeiture Provisions
‒ 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 32
Final Word on Clawbacks / Forfeitures‒ Obtain legal advice prior to any enforcement attempt
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 stand-alone exercise Evaluate what your peer group companies are doing/considering and
incorporate the clawback/forfeiture provisions in the overall executive compensation program design
Data Privacy33
© 2014 Baker & McKenzie LLP
Australia –New Data Privacy Legislation
– New data privacy law, Australian Privacy Principles (“APP”), took effect on March 12, 2014 APP regulate the handling of personal information by both
businesses and Australian government agencies Replaces existing data protection principles to strengthen
compliance Penalties of up to $A1.7 million for corporations
RECOMMENDED ACTION:
Stay tuned for further developments
34
© 2014 Baker & McKenzie LLP
Malaysia – New Data Privacy Legislation
– 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
35
© 2014 Baker & McKenzie LLP
South Africa– New Data Privacy Legislation
– 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!
36
Grant Acceptance37
© 2014 Baker & McKenzie LLP
Grant Acceptance —Particular Relevance for RSUs
‒ For options, acceptance of award can be built into the exercise process; participants must take affirmative action to exercise options
‒ No participant action is required when RSUs vest
‒ Therefore, there is no built-in mechanism in an RSU award that forces the participant to accept the award prior to the vesting date
‒ This same issue also impacts restricted stock awards and performance units/shares
38
© 2014 Baker & McKenzie LLP
Grant Acceptance -- Why is it Important?
‒ Award agreement contains terms and conditions that protect the company in case of disputes
e.g., tax withholding consent, vested rights disclaimer, data privacy consent, governing law/venue provision
‒ Award Agreement may also include other provisions that are beneficial to the company
e.g., restrictive covenants such as non-competes and non-solicits
‒ Important that plan participants affirmatively agree to those terms and conditions so they are more likely to be enforceable
39
© 2014 Baker & McKenzie LLP
Possible Solution #1Cancel the award if not accepted by first vesting date
‒ Accounting Issues
Expense and share counts would be disclosed from grant date through the first vest date until the award is forfeited
‒ Non-US tax issues
If tax due at grant, may not be able to recoup despite cancellation (e.g., France)
‒ Consider communications/employee relations issues
40
© 2014 Baker & McKenzie LLP
Possible Solution #2No new grants to participant if he/she fails to accept award within timeframe or at all
‒Hybrid of Solution #1
Does not rectify the original grant issues
‒Accounting Issues?
‒No tax issues
– Communications/employee relations issues
41
© 2014 Baker & McKenzie LLP
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
Other exceptions; no legally binding right
FICA due on vesting even if shares not issued
42
© 2014 Baker & McKenzie LLP
Possible Solution #3 (cont’d)
‒ No accounting issues
‒ Non-US tax issues
In several countries, tax due at vesting even if shares not issued (e.g., Australia)
Problem: how to cover tax if shares not issued?
Issue sufficient number of shares to cover tax
Withhold from salary
Administratively cumbersome
43
© 2014 Baker & McKenzie LLP
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
44
© 2014 Baker & McKenzie LLP
Possible Solution #5Issue shares at vesting but restrict sale/transfer of shares until acceptance
‒Accounting issues
No issues (if communicated in Plan or Grant Agreement) – share & sale restrictions for other reasons typically result in a discounted fair value
Non-US tax issues
Tax only due when restrictions lapse (e.g., Australia)
Reduced taxable amount to reflect restrictions (e.g., Switzerland)
Dual tax events: tax at vesting/issuance and upon lapse of restrictions (e.g., United Kingdom)
45
© 2014 Baker & McKenzie LLP
Possible Solution #6Try to obtain acceptance but issue shares on the vesting date even if not obtained ‒Administratively cumbersome to chase employees
‒No accounting issues
‒Enforceability of award provisions may be limited
For example, restrictive covenants and entitlement provisions
‒Less protection in case of disputes
‒Authority to withhold shares (or sell to cover) for income and social insurance tax withholding may be questionable
‒No authority to transfer employee personal data from certain countries, unless consent obtained separately (e.g., in equity side/offer letter)
46
© 2014 Baker & McKenzie LLP
Possible Solution #7Implied or negative acceptance
‒ No accounting issues
‒ Enforceability of award provisions may be limited
For example, restrictive covenants and entitlement provisions
‒ Less protection in case of disputes
‒ Authority to withhold shares (or sell to cover) for income and social insurance tax withholding may be questionable
‒ No authority to transfer employee personal data from certain countries, unless consent obtained separately (e.g., in equity side/offer letter)
47
© 2014 Baker & McKenzie LLP
Possible Solution #8Require acceptance of standard terms prior to making grant
‒ No accounting issues
‒ Administratively cumbersome (especially if broad-based grants)
‒ Non-US issue:
May lead to entitlement issues if grant not made
48
© 2014 Baker & McKenzie LLP
Recap
‒ One-size fits all approach may not be the best option
‒ Consider using different solutions in different jurisdictions or for different groups of participants
‒ When considering any solution consider: tax, accounting, labor law and data privacy issues – as well as company profile
49
© 2014 Baker & McKenzie LLP 50
Common Practices
Do you require employees to accept awards?
If yes, what action do you take if awards aren’t accepted before vesting?
Source: May 2011 NASPP Quick Survey on Restricted Stock and Units
CEO Pay Ratio Disclosure51
© 2014 Baker & McKenzie LLP
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)
52
© 2014 Baker & McKenzie LLP
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: 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 based on consistent definition of pay Median employee’s pay the computed based on definition
of compensation for SCT to calculate the ratio
Statistical sampling permissible to determine median employee
53
© 2014 Baker & McKenzie LLP
CEO Pay Ratio Disclosure
‒ Action to take now Start looking at how your company will perform this
calculation How to identify employees Definition of compensation that is consistent for both US
and non-US employees Statistical sampling
Get on the team Stock is a big component of compensation; make sure
stock plan admin is part of the team looking at this issue for your company
54
© 2014 Baker & McKenzie LLP
Global Equity Matrix App
Information on the key compliance issuesfor equity awards. It covers tax andsecurities, exchange control, labor anddata privacy issues in 50 countries.
Available for free on your iPhone, iPad orAndroid smartphone
More at www.bakermckenzie.com/GESAPP
55
Questions?56