Issues Related to Global Executive Plans PwC Siobhan Hurley, PricewaterhouseCoopers LLP

Issues Related to Global
Executive Plans
Siobhan Hurley, PricewaterhouseCoopers LLP
Steve Brown, Accenture
5 November 2001, NCEO Global Equity Compensation Forum
PwC
Case Study
Design and Implementation of Share Plans at Accenture
Agenda
• General background on Accenture
and how Company determined its
equity compensation philosophy
• Discussion of country specific
issues that Accenture faced as a
result of equity compensation
philosophy
• Key regulatory issues that
Accenture faced and how resolved
Accenture Background
• Large multi-national company was implementing equity plans for the first
time in conjunction with IPO
• Change in corporate structure generated a need for new compensation
structure -- Transitioning from partnership to corporation
• Highly mobile global workforce
– Operating in 46 countries
– 75,000 employees; 2,500 partners
• IPO put a tight deadline on implementation
• 2 key and distinct groups to satisfy: Executives (i.e.“partners”) and
employees
– The Plans needed to offer maximum flexibility to satisfy both groups
Accenture Share Plans
• 3 Plans Implemented:
– Stock Option Plan
– Employee Stock Purchase Plan
– Restricted Share Units (RSU’s)
– Promise to deliver Accenture shares at no cost to employee at a
specified future date
– No voting or dividend rights until shares delivered
Accenture Objectives
• Implement all plans in all countries wherever legally possible
• Encourage long-term ownership for partners
• Celebrate the IPO and encourage ownership by employees
• Flexibility to make plans attractive to executives as well as broader employee
base
Accenture Plan Design
Stock Options:
– Stock option grants limited to managers and above
– One-time grants at IPO
– Possibility of future grants upon promotion or being hired
– Significant future grants anticipated upon promotion to “partner”
ESPP:
– ESPP designed to offer broad, ongoing participation to employees
– Excludes partners
Restricted Share Units: (RSU’s):
– Generally one-time celebratory grants at IPO
– Designed to offer broad participation (Provided to all employees)
– Also provided to key executives (I.e. newly promoted, high performing partners)
Accenture Plan Design
Key Distinctions between Executives (“partners”) and employees:
• Options:
– 4 year vesting for employees
– 5 year vesting for partners
• RSU’s:
– 100% vested for employees at IPO
– Share delivery at 18 and 36 months from IPO for employees
– Generally 5 year vesting for partners with Share deliver spread over 8 years
Plan Implementation
• Now that decision of which plans to
offer and to whom had been made,
Accenture needed to make this
happen globally
• Objective of providing flexibility and
satisfying different groups
necessitated creativity in some
jurisdictions
• Other jurisdictions posed regulatory
problems
Netherlands – Stock Options
• Traditionally, tax is due at vesting of stock options
• Recent legislation allows employees to choose to defer taxation until
exercise
• However, social tax is still due at vesting and possibility of any deemed
discount to be taxed at vesting; corporate deduction can also be an issue
• Some companies are seeking rulings to allow only full cashless exercise;
• With ruling, Dutch tax authorities treat award as cash compensation, not
under stock option rules; entire spread is taxed at exercise
• Problem: reconciling desire of some employees to hold shares with
administrative issues
Netherlands – Solution for Stock Options
• Decision: Offer employees a choice of Stock Option grants
Alternative A: Standard grant
with income and social tax at
vesting
•Chosen by 3 of 18 partners who received
options
Alternative B: Standard grant
with choice under new rules to
defer income tax until exercise
No employees or partners chose this
alternative
Alternative C: Grant that allows
for full cashless exercise only; all
taxes now due at exercise/sale
•Chosen by 15 of 18 partners who received
options
•Chosen by 29 of 243 employees
•Chosen by 214 of 243 employees
Netherlands – RSU’s
• RSUs would be taxed at time of RSU grant (generally IPO date), as they
are fully vested at grant, rather than at receipt of actual shares
• Broad-based nature of RSUs - tax at grant could make the awards a
burden for the employees rather than something positive
• Failure to present alternatives to employees could create problems with
Works Council
• Company wanted to make certain they could achieve their aim of
allowing all employees to participate in IPO but keep the grant as
flexible as possible
Netherlands – Solution for RSU’s
• Decision: Offer employees a choice of RSU grants
Alternative A: Taxed at time of
grant of RSU on FMV of shares
with a discount factor
•Chosen by 0 partners
Alternative B: Tax at time shares
are delivered based on FMV on
date of delivery. Requires vesting
conditions and ability to convert
shares to cash.
•Chosen by 3 of 3 partners who received
RSU’s
•Chosen by 250 of 838 employees
•Chosen by 588 of 838 employees
Switzerland
• Generally, tax is due at grant
• Taxation can be shifted to exercise if certain conditions are met:
– Option life is greater than 10 years
– Vesting period is greater than 5 years
– Option cannot be objectively valued at grant
Switzerland -- Solution
• 2 plans offered -- employees have choice
• Standard grant with 10 year life -- tax at grant
• Amended grant with 10 year + 1 month life -- tax at exercise
• Employees choose before grant
• Allows employees with funds and ability to take risk the opportunity to
pay tax at grant
– One of 8 partners and 5 of 95 employees who received options chose tax
at grant
Japan
• Securities filing requirements are complex and can be time consuming
• Number and value of anticipated option grants upon IPO meant full
securities filing (Form 7) would be necessary
• Time involved in preparing and translating audited financial statements
meant it was unlikely filing would be completed prior to IPO
• Accenture was faced with the possibility that if grants may not be able to
take advantage of IPO price
Japan -- Solution
• Establish a trust to which the options are granted—Ninni Kumiai (the
NK)
• Company grants options to the NK indicating optionee’s name and
number of options
• NK is viewed as single holder of options – full Form 7 not necessary
• When NK is dissolved, options are distributed to optionees under
original terms and conditions
Regulatory Issues Faced by Accenture
• Primarily exchange control issues, although securities regulations also
were a factor
• Post IPO implementation of ESPP meant more time to complete
exchange control filings; not the case for securities filing in Japan
• Accenture been successful in offering ESPP in “unusual” locations—
Brazil, India, South Africa
• Looking at possibilities for China and Russia
China
• Lack of regulations and responsible authority on stock plans means
there are numerous discrepancies on what is permissible
• Exchange controls are strict; previously thought to include ownership of
foreign shares
• Currently, it is believed ownership of shares is OK, but still difficult to
remit funds
• Accenture decided to proceed with implementation of options and
RSUs; employees generally must do a sell to cover or cashless exercise
• ESPP– Cash-based alternatives available
India
• Exchange control restrictions -- annual remittances greater than
$20,000 require Reserve Bank of India (RBI) approval
• All plans were extended to employees, but local entity must monitor
compliance with $20,000 limit for ESPP
• Generally, sell to cover and cashless exercise are necessary for options
• In order to secure most favorable tax treatment, a change to the RSU
plan was necessary
– RSU recipients must pay a nominal purchase price when they
receive the shares
India New Guidelines
• Exchange controls were not the only difficulty faced in India
• Confusing guidelines published by the Securities and Exchange Board
of India (SEBI) meant taxation of plans was unclear
• Conflicting information made full implementation difficult—plans were
rolled out, but caveated that tax treatment could change
• New Central Government guidelines published October 5, 2001
• Clarified that plans of foreign parent companies are eligible for
preferential tax treatment (tax at sale) – retroactive to April 2000
Brazil
• Exchange controls make implementation difficult
• Remittance abroad of more than $20,000 per year requires Central
Bank of Brazil (CBB) approval
• Company can make remittances on behalf of employees below that
amount, but must report details to the CBB
• Funds remitted by employees for ESPP are tracked and monitored by
the company to ensure that $20,000 annual limit is not exceeded
South Africa
• Exchange control restrictions make stock plans difficult to implement
• Accenture opted to file for exchange control approval in order to extend
stock plans to the fullest extent possible
• Employees can participate in all 3 Accenture plans
• Any remittance of funds as part of participation counts against
employees lifetime investment allowance of RND 750,000
• All exercise methods available (exercise and hold, sell to cover, full
same-day-sale) as long as investment allowance is respected
Closing Comments and Questions
• Strategy is important for global plans – need
to understand what the company’s objectives
are in order to make the best decisions when
faced with country specific challenges
• Companies may need to offer choices in some
countries in order to provide the flexibility to
satisfy both executives and broader employee
population
• There are alternatives and solutions for
problems with exchange controls and
securities filings