Trends in the International ESPP Landscape   Philadelphia NASPP Chapter Meeting October 20, 2009 
Table of contents 47 Contact information VI <ul><ul><li>ESPP alternatives </li></ul></ul><ul><ul><li>Reporting requirement...
Section 1 Overview of Employee Stock Purchase Plans (ESPP)
Why offer ESPP Plans Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Flexibility and choice </li>...
Key features of ESPPs <ul><ul><li>Opportunity to purchase company stock at a discount </li></ul></ul><ul><ul><li>Average e...
Key features of ESPPs Section 1 – Overview of Employee Stock Purchase Plans (ESPP) 1 From the PwC Global Equity Incentives...
Key features of ESPPs Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Discontinuation of ESPP </l...
Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul...
Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul...
Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul...
Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul...
Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul...
Survey results from PwC’s Global Equity Incentives Survey  Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <u...
Ways to reduce employer compensation cost Section 1 – Overview of Employee Stock Purchase Plans (ESPP) From NASPP Annual C...
Changes to reporting requirements <ul><ul><li>New IRS reporting requirements proposed </li></ul></ul><ul><ul><li>Form 3922...
ESPP alternatives <ul><li>There are three types of ESPP Plans: 1 </li></ul><ul><ul><li>Qualified Plans under Section § 423...
ESPP alternatives  Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Used for retired employees (no...
Section 2 Impact of falling stock prices on ESPPs
Impact of falling stock prices on ESPPs Section 2 <ul><ul><li>Employee deferral percentage: 10% of pay </li></ul></ul><ul>...
Impact of rising stock prices on ESPPs Section 2 – Impact of falling stock prices on ESPPs  <ul><ul><li>Employee deferral ...
Impact of falling stock prices on ESPPs Section 2  <ul><ul><li>Employee reaches IRS maximum of $25,000 within 6 months  </...
Impact of falling stock prices on ESPPs Section 2  <ul><ul><li>If not, shareholder approval needs to be in place </li></ul...
Impact of falling stock prices on ESPPs Section 2  <ul><ul><li>Perceived “value” of Plan may decrease given falling stock ...
What can your company do? <ul><ul><li>Communication and administration </li></ul></ul><ul><ul><ul><li>Develop communicatio...
Section 3 Latest trends in ESPPs
Trends in ESPPs Section 3 – Latest trends in ESPPs 1 From the PwC Global Equity Incentives Survey <ul><ul><li>ESPPs became...
Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs Options:  Service Options:  P...
Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs Driver of equity comp practic...
Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs ESPP participation levels - U...
Section 4 International considerations
International considerations Section 4 <ul><ul><li>Top five countries showing reduction in prevalence are Taiwan, Germany,...
Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>Countries w...
Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>Countries w...
Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP partic...
Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP partic...
Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP partic...
International considerations  <ul><ul><li>ESPPs are commonly extended to employees of foreign entities </li></ul></ul><ul>...
International considerations  <ul><ul><li>Small tax exemptions/concessions are available in: </li></ul></ul><ul><ul><ul><l...
International considerations  Section 4 <ul><ul><li>Share Incentive Plan (SIP) </li></ul></ul><ul><ul><ul><li>Can be used ...
International considerations  Section 4 <ul><ul><li>Save As You Earn (SAYE) </li></ul></ul><ul><ul><ul><li>Can be used wit...
International considerations  Section 4 For UK companies only from the Proshares 2008 SAYE Survey <ul><ul><li>SAYE and SIP...
International considerations  Section 4 1 From the Proshares 2008 SAYE Survey <ul><ul><li>SAYE plans/approval </li></ul></...
International considerations  Section 4  <ul><ul><li>Plan d’Epargne d’Enterprice (PEE) </li></ul></ul><ul><ul><ul><li>Like...
International considerations  Section 4 4 80 84 20 <80> 100 Taxable benefit  Actual benefit  <ul><ul><li>Less: purchase pr...
International considerations  Section 4 <ul><ul><li>Typically see a wider range of purchase prices: 60%-90% FMV </li></ul>...
International considerations  Section 4 <ul><ul><li>“ Dexia Model” Used by Dexia Bank in Europe </li></ul></ul><ul><ul><ul...
International considerations  Section 4 1 From the PwC Global Equity Incentives Survey <ul><ul><li>ESPPs increasing in Chi...
Section 5 Questions & answers
Section 6 Contact information
Contact information <ul><ul><li>PricewaterhouseCoopers LLP </li></ul></ul>Section 6 [email_address] (267) 330 – 6331 Geoff...
 © 2009 PricewaterhouseCoopers LLP. All rights reserved. &quot;PricewaterhouseCoopers&quot; refers to PricewaterhouseCo...
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Recent Trends and Issues in ESPPs

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A discussion of operational issues in ESPPs and the results from PwC's Global Equity Incentives Survey concerning international trends in the ESPP landscape

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  • Here we can see the major changes in ESPP plans in recent years. The discount offered on the price of shares is by for the predominant change in these plans.
  • As can be seen here, a slight majority of companies offer no look back period. For those that do offer a look back period, all firms in the 2009 survey choose either a 6 or 12 month lookback period. This result is quite different from the previous year when firms chose a variety of different lookback periods.
  • As is the case with the lookback period, the majority of firms are starting to issue a common discount for the ESPP. Over 2/3 of companies surveyed issue 15% discounts for their ESPP plans. Slight increase in number of companies using 15% discount.
  • Again here, most companies are adopting a standard purchase period of 6 months. As can be seen in this chart, the 2007 results indicated a wide variety of purchase period lengths, while this year’s survey results indicate a convergence towards the 6 month period.
  • AS can be seen here, most firms do not plan to discontinue their ESPPs, for those that due, most plan to eliminate them altogether.
  • Three year trend towards using Safe Harbor Plans. In the past three years, more firms have steadily chosen to issue Safe Harbor ESPP plans, which incur no compensation expenses under FAS 123R. More than 5% increase every year to offer ESPP with no look back and 5% discount.
  • As can be seen here, ESPP plans are a less common type of equity vehicle than either stock options or restricted stock units (RSUs). This chart displays the increase in RSUs and the decrease in the other main types of equity tools including both options and ESPP plans. While the frequency of RSUs rose over ten percent in the past two years, the prevalence of ESPP plans and stock option plans both declined around ten percent. Decline in performance based RSU and rise in service based RSUs – importance of recruiting in a down market. Overall decline in ESPP plans. Note: survey completed in Nov 2007 and Jan 2009 surveys are only a little over a year apart.
  • While the main driver of equity compensation practices remains aligning compensation with a business strategy, the strength of this equity purpose declined in the past year. Accounting issues are no longer a main driver for granting practices. Real driver = aligning comp/market trends.
  • Country where ESPP prevalence decreased by 3% or more in 2009 This graph indicates an interesting change from 2007 to 2009. Participation levels appear to be on the rise overall in the US. Therefore, when companies are continuing to use ESPP plans, employees are making increased use of them.
  • Country where ESPP prevalence decreased by 3% or more in 2009 For Germany, on the other hand, participation appears to be decreasing.
  • Country where ESPP prevalence increased by 3% or more in 2009. Participation in Argentina appears relatively stable between 2007 and 2009. Participation may be low here due to the newness of plans.
  • Country where ESPP prevalence increased by 3% or more in 2009. Russia shows a drastic change in ESPP participation, which substantially fell between 2007 and 2009. Again, participation may be low here due to the newness of plans.
  • Recent Trends and Issues in ESPPs

    1. 1. Trends in the International ESPP Landscape Philadelphia NASPP Chapter Meeting October 20, 2009 
    2. 2. Table of contents 47 Contact information VI <ul><ul><li>ESPP alternatives </li></ul></ul><ul><ul><li>Reporting requirements </li></ul></ul><ul><ul><li>Operation of ESPPs </li></ul></ul>46 Questions & answers V 29 International considerations IV 24 Latest trends – Survey results from PwC’s Global Equity Incentives Survey III 17 Impact of falling stock prices on ESPPs II 2 Overview of Employee Stock Purchase Plans (ESPP) I Page Section
    3. 3. Section 1 Overview of Employee Stock Purchase Plans (ESPP)
    4. 4. Why offer ESPP Plans Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Flexibility and choice </li></ul></ul><ul><ul><ul><li>Employees choose to opt in or out of plan </li></ul></ul></ul><ul><ul><ul><li>Convenience of payroll deduction </li></ul></ul></ul><ul><ul><ul><li>Buy stock at discount to market value </li></ul></ul></ul><ul><ul><ul><li>Immediately vested, can sell stock at any time </li></ul></ul></ul><ul><ul><li>Employee benefit </li></ul></ul><ul><ul><li>Retain, attract and motivate </li></ul></ul><ul><ul><li>Align all staff levels with shareholder interest and ownership </li></ul></ul><ul><ul><li>Employer benefit </li></ul></ul>
    5. 5. Key features of ESPPs <ul><ul><li>Opportunity to purchase company stock at a discount </li></ul></ul><ul><ul><li>Average employer discounts of 15% (see below) </li></ul></ul><ul><ul><li>Discount may not be taxable (in the US); Growth in value may be taxed as capital gain </li></ul></ul><ul><ul><li>Purchases funded through payroll deductions </li></ul></ul><ul><ul><li>Average purchase period is 6 to 12 months </li></ul></ul><ul><ul><li>Look-back provision enables employees to purchase shares at minimum price (resets purchase price) </li></ul></ul>Section 1 – Overview of Employee Stock Purchase Plans (ESPP) 1 From the PwC Global Equity Incentives Survey <ul><ul><li>7% </li></ul></ul><ul><ul><li>More than 15% </li></ul></ul><ul><ul><li>7% </li></ul></ul><ul><ul><li>Other </li></ul></ul><ul><ul><li>71% </li></ul></ul><ul><ul><li>15% </li></ul></ul><ul><ul><li>7% </li></ul></ul><ul><ul><li>5%-15% </li></ul></ul><ul><ul><li>7% </li></ul></ul><ul><ul><li>% of companies 1 </li></ul></ul><ul><ul><li>5% </li></ul></ul><ul><ul><li>Amount of discount </li></ul></ul>
    6. 6. Key features of ESPPs Section 1 – Overview of Employee Stock Purchase Plans (ESPP) 1 From the PwC Global Equity Incentives Survey <ul><ul><li>Purchase period </li></ul></ul><ul><ul><ul><li>More than 20% of companies changed their purchase period to 6 to 12 months </li></ul></ul></ul><ul><ul><ul><li>50% of companies offer 6 month purchase period in 2009 compared to 24% in 2007 </li></ul></ul></ul><ul><ul><li>Look-back provision </li></ul></ul><ul><ul><ul><li>Companies maintained status quo - no look-back provision </li></ul></ul></ul><ul><ul><ul><li>56% of companies have no look-back provision in 2009 compared to 57% in 2007 </li></ul></ul></ul><ul><ul><li>Employer discount </li></ul></ul><ul><ul><ul><li>72% of companies offer a 15% discount in 2009 compared to 53% in 2007 </li></ul></ul></ul><ul><ul><ul><li>Thus approximately 20% of companies increased their Plan discount to 15% </li></ul></ul></ul><ul><ul><li>2009 survey 1 results show </li></ul></ul>
    7. 7. Key features of ESPPs Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Discontinuation of ESPP </li></ul></ul><ul><ul><ul><li>12% of participants discontinued their Plans </li></ul></ul></ul><ul><ul><ul><li>70% of companies in 2009 are not discontinuing their ESPP compared to 83% in 2007 </li></ul></ul></ul><ul><ul><ul><li>8% participants replaced the ESPP with cash awards </li></ul></ul></ul><ul><ul><ul><li>21% of companies eliminated the ESPP with no replacement in 2009 compared to 18% in 2009 </li></ul></ul></ul><ul><ul><li>“ Safe Harbor” eligibility </li></ul></ul><ul><ul><ul><li>27% of participants qualified for the “Safe Harbor” plan in 2009 such that they did not have to accrue a compensation expense compared to 22% in 2007 </li></ul></ul></ul><ul><ul><li>2009 survey results show </li></ul></ul>
    8. 8. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>What features of ESPP have changed? </li></ul></ul>0% 10% 20% 30% 40% 50% 60% 70% Look-back Discount Purchase period Other 2009 2007 2006
    9. 9. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>What is the lookback for the ESPP? </li></ul></ul>0% 10% 20% 30% 40% 50% 60% No look-back 3 months 6 months 12 months 24 months Other 2009 2007
    10. 10. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>What is the discount for the ESPP? </li></ul></ul>0% 10% 20% 30% 40% 50% 60% 70% 80% 5% More than 5% and less than 15% 15% More than 15% Other 2009 2007
    11. 11. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Length of purchase period for ESPP </li></ul></ul>0% 10% 20% 30% 40% 50% 60% Single day 1 month 3 months 6 months 12 months Other 2009 2007
    12. 12. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>If discontinued ESPP, replaced with what? </li></ul></ul>2009 2007 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% We have not discontinued our ESPP Eliminate - no replacement Replaced with cash Replaced with non-equity-based benefit (DC plan, etc.)
    13. 13. Survey results from PwC’s Global Equity Incentives Survey Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Does your ESPP qualify as a &quot;Safe Harbor&quot; plan under FAS 123R (no comp expense)? </li></ul></ul>Yes No
    14. 14. Ways to reduce employer compensation cost Section 1 – Overview of Employee Stock Purchase Plans (ESPP) From NASPP Annual Conference 2007 <ul><ul><li>The smaller the discount, the less the cost per share </li></ul></ul>Reduce discount (e.g. from 15% to 5%) <ul><ul><li>Reduces administrative and cost burden </li></ul></ul>Eliminate look-back feature <ul><ul><li>The longer the offering period, the more diluted the Plan, since employees are more likely to purchase their shares at a substantial discount </li></ul></ul><ul><ul><li>Shorten offering period (e.g. from 24 months to 6 months) </li></ul></ul>$0.00 $0.00 $1.00 $1.13 $1.50 $1.70 None $1.86 $1.93 $2.29 $2.43 $2.72 $2.92 6 months $2.43 $2.53 $2.83 $3.02 $3.23 $3.51 12 months $2.87 $2.98 $3.24 $3.46 $3.61 $3.95 <ul><ul><li>18 months </li></ul></ul>$3.23 $3.36 $3.58 $3.84 $3.94 $4.33 <ul><ul><li>24 months </li></ul></ul><ul><ul><li>Limit </li></ul></ul><ul><ul><li>Limit </li></ul></ul><ul><ul><li>Limit </li></ul></ul><ul><ul><li>No limit </li></ul></ul><ul><ul><li>No limit </li></ul></ul><ul><ul><li>No limit </li></ul></ul><ul><ul><li>Look-back period </li></ul></ul><ul><ul><li>5% discount </li></ul></ul><ul><ul><li>10% discount </li></ul></ul><ul><ul><li>15% discount </li></ul></ul><ul><ul><li>ESPP cost per $10 share </li></ul></ul>
    15. 15. Changes to reporting requirements <ul><ul><li>New IRS reporting requirements proposed </li></ul></ul><ul><ul><li>Form 3922 must be filed with the IRS by January 31 of the year following the year in which the transfer occurred </li></ul></ul><ul><ul><li>Effective date 1/1/2010; Applies to any stock transfer on or after 1/1/2007 </li></ul></ul><ul><ul><li>Transitional relief available for 2007 and 2008 but information statements must still be provided to employees </li></ul></ul><ul><ul><li>Employee information statement must include details of FMV of stock at purchase; discount; date of purchase etc. </li></ul></ul><ul><ul><li>Separately, new ESPP regulations have been proposed that provide clarity on ESPP rules. For example, they intend to clarify when Plan amendments require shareholder approval </li></ul></ul><ul><ul><li>In addition, the proposed regulations intend to align the ESPP with ISO rules on determination of maximum number of Plan shares </li></ul></ul>Section 1 – Overview of Employee Stock Purchase Plans (ESPP)
    16. 16. ESPP alternatives <ul><li>There are three types of ESPP Plans: 1 </li></ul><ul><ul><li>Qualified Plans under Section § 423 IRC; </li></ul></ul><ul><ul><li>Non-Qualified Purchase Plans; and </li></ul></ul><ul><ul><li>Direct-Purchase Plans </li></ul></ul><ul><li>Despite the comprehensive eligibility requirements and administrative burden nearly 70% of companies continue to operate Qualified ESPPs </li></ul>Section 1 – Overview of Employee Stock Purchase Plans (ESPP) 1 Prevalence data from The Ayco Company 2008 No Discount Discount may exceed 15% Maximum discount of 15% <ul><ul><li>Discount </li></ul></ul>None Withholding/reporting obligations; corporate income tax deduction No withholding obligations; no reporting obligations; no corporate income tax deduction <ul><ul><li>Employer taxes </li></ul></ul>Tax at purchase; capital gains at sale Tax at purchase; capital gains at sale No tax at purchase; capital gains at sale <ul><ul><li>Employee taxes </li></ul></ul>No maximum No maximum <ul><ul><li>5-Year maximum </li></ul></ul><ul><ul><li>Holding period </li></ul></ul>May be limited to higher paid employees May be limited to higher paid employees <ul><ul><li>Comprehensive </li></ul></ul><ul><ul><li>Eligibility </li></ul></ul>Direct-purchase plans <ul><ul><li>Non-qualified plans </li></ul></ul><ul><ul><li>Qualified plans </li></ul></ul><ul><ul><li>% of companies </li></ul></ul><ul><ul><li>20% </li></ul></ul><ul><ul><li>13% </li></ul></ul><ul><ul><li>67% </li></ul></ul><ul><ul><li>Feature </li></ul></ul>
    17. 17. ESPP alternatives Section 1 – Overview of Employee Stock Purchase Plans (ESPP) <ul><ul><li>Used for retired employees (not current employees) </li></ul></ul><ul><ul><li>Company stock is part of overall asset mixture </li></ul></ul><ul><ul><li>Only for U.S. employees (not international) </li></ul></ul><ul><ul><ul><li>Private retirement plan </li></ul></ul></ul><ul><ul><li>Indirect ownership of company stock </li></ul></ul>ESOP as part of a 401(K) plan <ul><ul><li>Employees receive cash balance upon retirement, resignation, or termination of employment </li></ul></ul><ul><ul><li>Company allocates a certain number of shares annually and distributes shares based on overall compensation </li></ul></ul><ul><ul><li>Usually mandatory </li></ul></ul><ul><ul><li>Tax-deferred until retirement </li></ul></ul><ul><ul><li>Employee Stock Ownership Plans (ESOP) </li></ul></ul>
    18. 18. Section 2 Impact of falling stock prices on ESPPs
    19. 19. Impact of falling stock prices on ESPPs Section 2 <ul><ul><li>Employee deferral percentage: 10% of pay </li></ul></ul><ul><ul><li>Employer discount: 15% </li></ul></ul><ul><ul><li>Employee share limit: 500 shares </li></ul></ul><ul><ul><li>Price at beginning of offering period: $50 </li></ul></ul><ul><ul><li>Stock price decreases: $50  $10 </li></ul></ul><ul><ul><li>Purchase price: 85% of $10 = $8.50 per share </li></ul></ul><ul><ul><li>Total employee discount: ($10 - $8.50)/$10 = 15.0% </li></ul></ul>Example <ul><ul><li>When stock price falls, employees can purchase more shares </li></ul></ul>
    20. 20. Impact of rising stock prices on ESPPs Section 2 – Impact of falling stock prices on ESPPs <ul><ul><li>Employee deferral percentage: 10% of pay </li></ul></ul><ul><ul><li>Employer discount: 15% </li></ul></ul><ul><ul><li>Price at beginning of offering period: $50 </li></ul></ul><ul><ul><li>Stock price increases: $50  $70 </li></ul></ul><ul><ul><li>Purchase price: 85% of $50 = $42.50 per share </li></ul></ul><ul><ul><li>Total employee discount: ($70 - $42.50)/$70 = 39.2% </li></ul></ul>Example <ul><ul><li>In contrast, when stock price rises, employees unequivocally gain </li></ul></ul>
    21. 21. Impact of falling stock prices on ESPPs Section 2 <ul><ul><li>Employee reaches IRS maximum of $25,000 within 6 months </li></ul></ul><ul><ul><li>Contributions above $4,250 must be returned to employee </li></ul></ul><ul><ul><li>Employers need to have appropriate refund procedures in place </li></ul></ul>Result <ul><ul><li>Total contributions to purchase 500 shares (employee’s annual limit): $8.50 x 500 = $4,250 </li></ul></ul><ul><ul><li>With decreasing share price, contributions within 6 months result in the annual IRS limit being exceeded: $4,250 x 6 months = $25,500 </li></ul></ul>Example <ul><ul><li>As a consequence, companies may have to refund participant contributions </li></ul></ul>
    22. 22. Impact of falling stock prices on ESPPs Section 2 <ul><ul><li>If not, shareholder approval needs to be in place </li></ul></ul><ul><ul><li>Cancellation of “underwater” shares without shareholder renewal </li></ul></ul><ul><ul><li>Automatic cancellation in some cases </li></ul></ul><ul><ul><ul><li>Creates inactive plan for 2009 and beyond </li></ul></ul></ul>Sufficient plan shares available? <ul><ul><li>Higher number of shares available for purchase </li></ul></ul><ul><ul><li>The limit could help manage potential share depletion </li></ul></ul>$25,000 IRS fixed annual limit (for Section 423 plans) <ul><ul><li>Funds available for share purchase must be returned </li></ul></ul><ul><ul><ul><li>Cash burden for company </li></ul></ul></ul><ul><ul><ul><li>PR damage to plan </li></ul></ul></ul><ul><ul><li>Ensure correct payroll processing of refunded contributions </li></ul></ul><ul><ul><li>Ensure appropriate employee communications </li></ul></ul><ul><ul><li>Contributions higher than purchases </li></ul></ul>
    23. 23. Impact of falling stock prices on ESPPs Section 2 <ul><ul><li>Perceived “value” of Plan may decrease given falling stock prices </li></ul></ul><ul><ul><li>Employees may sell immediately to avoid risk of future stock price decline and company instability </li></ul></ul><ul><ul><li>This would result in an increase in “disqualifying dispositions” </li></ul></ul><ul><ul><li>PR damage - will ESPPs continue to be associated with higher productivity, return on assets, and profitability for employees? </li></ul></ul><ul><ul><li>In the US, ESPPs formed part of the equity mix in 30% of companies in 2009 compared to 38% in 2007: a decline of 8% over 2 years </li></ul></ul><ul><ul><li>Employee reaction </li></ul></ul>
    24. 24. What can your company do? <ul><ul><li>Communication and administration </li></ul></ul><ul><ul><ul><li>Develop communication strategy & materials </li></ul></ul></ul><ul><ul><ul><li>Keep employees informed of changes </li></ul></ul></ul><ul><ul><ul><li>Encourage employees to participate in the plan </li></ul></ul></ul><ul><ul><li>Review current plan design </li></ul></ul><ul><ul><ul><li>Consider providing maximum share limits per employee </li></ul></ul></ul><ul><ul><ul><ul><li>Limit number of shares a single participant may purchase or shares all participants may purchase </li></ul></ul></ul></ul><ul><ul><ul><ul><li>This will help manage refunds and potential share depletion </li></ul></ul></ul></ul><ul><ul><ul><li>Consider plan suspension rather than cancellation </li></ul></ul></ul><ul><ul><ul><ul><li>If allocated shares are depleted, suspend plan for year rather than cancelling it </li></ul></ul></ul></ul><ul><ul><li>Tailor approach to your company </li></ul></ul>Section 2 – Impact of falling stock prices on ESPPs
    25. 25. Section 3 Latest trends in ESPPs
    26. 26. Trends in ESPPs Section 3 – Latest trends in ESPPs 1 From the PwC Global Equity Incentives Survey <ul><ul><li>ESPPs became popular in the 1980s/1990s for Bay Area firms (e.g. IBM, Microsoft & Google and remain prevalent in high tech companies) </li></ul></ul><ul><ul><ul><li>However, our survey results suggest the key driver in 2009 for equity compensation practices is the alignment of compensation with business strategy followed by addressing market trends </li></ul></ul></ul><ul><ul><ul><li>ESPPs formed part of the equity mix in 30% of companies in 2009 compared to 38% in 2007: a decline of 8% over two years </li></ul></ul></ul><ul><ul><li>Stability of ESPPs </li></ul></ul><ul><ul><ul><li>In 2006 more than 50% of participants planned to discontinue their ESPP. However, in 2007, ESPP usage stabilized at around 40%. In 2009 this dropped to 30% 1 </li></ul></ul></ul><ul><ul><ul><li>Overall US ESPP participation levels saw a 25% increase in 2009 in the 25% to 50% bracket </li></ul></ul></ul><ul><ul><ul><li>FAS123(R) did not substantially change ESPP prevalence </li></ul></ul></ul><ul><ul><li>Prevalence </li></ul></ul>
    27. 27. Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs Options: Service Options: Perf/Mkt RS & RSU: Service RS & RSU: Perf/Mkt SAR: Service SAR: Perf/Mkt Phantom Stock ESPP Equity comp mix - Companies with employees in the US 0% 10% 20% 30% 40% 50% 60% 70% 2009 All Companies 2007 All Companies 2006 All Companies
    28. 28. Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs Driver of equity comp practices 0% 10% 20% 30% 40% 50% 60% 70% 80% Align Comp w/ Bus. strategy Address market trends Changes made - Other Address shareholder issues International comp strategy Address Corp Gov/BoD issues Address tax issues Out of the money options Address Acc'g issues 2009 Grants 2008 Grants 2007 All Companies 2006 All Companies
    29. 29. Survey results from PwC’s Global Equity Incentives Survey Section 3 – Latest trends in ESPPs ESPP participation levels - US 0% 10% 20% 30% 40% 50% 60% 0-25% 25-50% 50-75% 75-100% 2009 2007
    30. 30. Section 4 International considerations
    31. 31. International considerations Section 4 <ul><ul><li>Top five countries showing reduction in prevalence are Taiwan, Germany, France, notably the U.S., and Hong Kong </li></ul></ul><ul><ul><li>Top five countries showing increase in prevalence are Uzbekistan, Kazakhstan, Kuwait, Saudi Arabia and Russia </li></ul></ul><ul><ul><li>Participation levels have increased in Germany even though prevalence has dropped </li></ul></ul><ul><ul><li>Significant increase in participation levels in Argentina and Russia </li></ul></ul><ul><ul><li>Prevalence </li></ul></ul>
    32. 32. Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>Countries with decreasing ESPP prevalence 2009 compared to 2007 </li></ul></ul>0% 5% 10% 15% 20% 25% 30% Taiwan Germany France United States Hong Kong Sweden Malaysia Spain Thailand Netherlands Italy Philippines Denmark United Kingdom Belgium
    33. 33. Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>Countries with increasing ESPP prevalence 2009 compared to 2007 </li></ul></ul>0% 5% 10% 15% 20% 25% 30% Uzbekistan Kazakhstan Kuwait Saudi Arabia Russia Argentina Other China Brazil Ireland Australia India Mexico
    34. 34. Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP participation levels - Germany </li></ul></ul>0-25% 25-50% 50-75% 75-100% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2009 2007
    35. 35. Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP participation levels - Argentina </li></ul></ul>0% 10% 20% 30% 40% 50% 60% 0-25% 25-50% 50-75% 75-100% 2009 2007
    36. 36. Survey results from PwC’s Global Equity Incentives Survey Section 4 – International considerations <ul><ul><li>ESPP participation levels - Russia </li></ul></ul>0% 10% 20% 30% 40% 50% 60% 70% 80% 0-25% 25-50% 50-75% 75-100% 2009 2007
    37. 37. International considerations <ul><ul><li>ESPPs are commonly extended to employees of foreign entities </li></ul></ul><ul><ul><li>However, in most cases, the ESPP is not considered tax-qualified locally </li></ul></ul><ul><ul><li>ESPP alternatives are available under country-specific, tax-favoured regimes (e.g. Save As You Earn in the U.K.) </li></ul></ul><ul><ul><li>Difficulty lies in maintaining the essence of the ESPP design </li></ul></ul><ul><ul><li>Typical issues faced include: </li></ul></ul><ul><ul><ul><li>Foreign laws prohibit exclusion of part-time employees (e.g. EU) </li></ul></ul></ul><ul><ul><ul><li>Employee contributions earn interest </li></ul></ul></ul><ul><ul><ul><li>Statutory reporting compliance for local payroll deductions and employment law considerations </li></ul></ul></ul><ul><ul><ul><li>Foreign exchange limitations (e.g. China) </li></ul></ul></ul>Section 4
    38. 38. International considerations <ul><ul><li>Small tax exemptions/concessions are available in: </li></ul></ul><ul><ul><ul><li>Austria (discount exempt up to Euro 1,460 if shares held for more than five yrs) </li></ul></ul></ul><ul><ul><ul><li>Germany (discount exempt up to Euro 360) </li></ul></ul></ul><ul><ul><ul><li>Italy (discount exempt up to Euro 2,065.83 if shares held for at least three yrs) </li></ul></ul></ul><ul><ul><ul><li>Norway (discount exempt up to Nok 1,500) </li></ul></ul></ul><ul><ul><ul><li>Spain (discount exempt up to Euro 2,000. (Euro 3,005 for social taxes) if shares held for more than three yrs) </li></ul></ul></ul><ul><ul><ul><li>U.K. (employees' contribution under SIP exempt up to GBP 1500) </li></ul></ul></ul><ul><ul><li>Tax approved alternatives are available in the U.K. and France and a tax efficient structure can be implemented in Switzerland </li></ul></ul>Section 4
    39. 39. International considerations Section 4 <ul><ul><li>Share Incentive Plan (SIP) </li></ul></ul><ul><ul><ul><li>Can be used without modification to ESPP </li></ul></ul></ul><ul><ul><ul><li>Employees purchase stock at pre-tax wages limited to £1,500 p.a. </li></ul></ul></ul><ul><ul><ul><li>Employees must hold shares for five years for maximum tax benefit </li></ul></ul></ul><ul><ul><ul><li>Employee only pays capital gains tax on growth in value after year five. Prior growth tax free. </li></ul></ul></ul><ul><ul><ul><li>No social taxes if required holding periods met </li></ul></ul></ul><ul><ul><li>Matching shares under SIP </li></ul></ul><ul><ul><ul><li>Used to mimic discount in ESPPs </li></ul></ul></ul><ul><ul><ul><li>E.g., instead of a 15% discount on share price, company can offer $15 in matching shares when the employee purchases $85 worth of company shares </li></ul></ul></ul><ul><ul><ul><li>However SAYE is more common in the U.K. </li></ul></ul></ul><ul><ul><li>United Kingdom </li></ul></ul>
    40. 40. International considerations Section 4 <ul><ul><li>Save As You Earn (SAYE) </li></ul></ul><ul><ul><ul><li>Can be used without modification to ESPP </li></ul></ul></ul><ul><ul><ul><li>Employees receive options to acquire shares after three, five or seven years </li></ul></ul></ul><ul><ul><ul><li>Employee contributions are used to fund exercise price and earn interest </li></ul></ul></ul><ul><ul><ul><li>Contributions made from after tax wages and limited to £3,000 p.a. </li></ul></ul></ul><ul><ul><ul><li>Employees must hold shares for three years for maximum tax benefit </li></ul></ul></ul><ul><ul><ul><li>Employee only pays capital gains tax on growth in value. Prior growth tax free. </li></ul></ul></ul><ul><ul><li>Discount of up to 20% possible under SAYE </li></ul></ul><ul><ul><ul><li>Used to mimic discount in ESPPs </li></ul></ul></ul><ul><ul><ul><li>SAYE is more common for UK companies. </li></ul></ul></ul><ul><ul><li>United Kingdom </li></ul></ul>
    41. 41. International considerations Section 4 For UK companies only from the Proshares 2008 SAYE Survey <ul><ul><li>SAYE and SIP </li></ul></ul>
    42. 42. International considerations Section 4 1 From the Proshares 2008 SAYE Survey <ul><ul><li>SAYE plans/approval </li></ul></ul><ul><ul><li>Trends: SAYE Plans </li></ul></ul><ul><ul><ul><li>Prevalence of three-year accounts </li></ul></ul></ul><ul><ul><ul><li>76% of companies offer the maximum 20% discount </li></ul></ul></ul><ul><ul><ul><li>Increasing number of companies have underwater options </li></ul></ul></ul><ul><ul><ul><li>Stability in frequency of plans; 43 new plans in 2008 </li></ul></ul></ul><ul><ul><li>United Kingdom 1 </li></ul></ul>
    43. 43. International considerations Section 4 <ul><ul><li>Plan d’Epargne d’Enterprice (PEE) </li></ul></ul><ul><ul><ul><li>Like a 401(K) plan </li></ul></ul></ul><ul><ul><ul><li>Employees purchase stock with after tax wages </li></ul></ul></ul><ul><ul><ul><li>Employees must hold shares for five years </li></ul></ul></ul><ul><ul><li>French-qualified stock option plan </li></ul></ul><ul><ul><ul><li>Convert existing ESPP into a qualified option plan </li></ul></ul></ul><ul><ul><ul><li>Need to establish a French sub-plan </li></ul></ul></ul><ul><ul><ul><li>Maximum discount: 20% of average stock price over 20 days prior to grant </li></ul></ul></ul><ul><ul><ul><li>Certain tax consequences for discounts greater than 5% </li></ul></ul></ul><ul><ul><li>France </li></ul></ul>
    44. 44. International considerations Section 4 4 80 84 20 <80> 100 Taxable benefit Actual benefit <ul><ul><li>Less: purchase price </li></ul></ul>Less: purchase price Tax value of share at purchase (per table) Taxable benefit at purchase FMV of share at purchase <ul><ul><li>Actual Benefit at purchase </li></ul></ul><ul><ul><li>FMV at purchase: 100 </li></ul></ul><ul><ul><li>Discount: 20 </li></ul></ul><ul><ul><li>Restriction on Sale: Three years from purchase </li></ul></ul>Example <ul><ul><li>No qualified or ESPP type plans but can mimic discount </li></ul></ul><ul><ul><li>Restriction on sale reduces FMV for tax purposes </li></ul></ul><ul><ul><li>Taxable benefit at purchase calculated with prescribed valuation tables </li></ul></ul><ul><ul><li>Switzerland </li></ul></ul>
    45. 45. International considerations Section 4 <ul><ul><li>Typically see a wider range of purchase prices: 60%-90% FMV </li></ul></ul><ul><ul><li>Often implemented for broad base of employees </li></ul></ul><ul><ul><li>Particularly beneficial tax treatment because private capital gains are generally tax-free in Switzerland </li></ul></ul><ul><ul><li>Thus only taxable element is the benefit at purchase i.e., the discount </li></ul></ul><ul><ul><li>ESPPs generally possible for non-quoted companies, but valuation is crucial and should be agreed with the tax authorities in advance </li></ul></ul><ul><ul><li>Employees may only benefit from tax-free private capital gains if the valuation represents fair market value (for tax purposes), and there is no change in the valuation mechanism </li></ul></ul><ul><ul><li>Switzerland </li></ul></ul>
    46. 46. International considerations Section 4 <ul><ul><li>“ Dexia Model” Used by Dexia Bank in Europe </li></ul></ul><ul><ul><ul><li>Employee loans money externally to purchase shares with 20% discount </li></ul></ul></ul><ul><ul><ul><li>Employee repays loan in fixed share amount rather than cash </li></ul></ul></ul><ul><ul><ul><li>If share price is insufficient to repay loan : employee regains the amount they invested </li></ul></ul></ul><ul><ul><ul><li>If share price is sufficient to repay loan : employee receives added value after loan is repaid </li></ul></ul></ul><ul><ul><ul><li>Result: Outside lender hedges to cover risk of share price decline </li></ul></ul></ul><ul><ul><ul><li>80% participation rate in Europe </li></ul></ul></ul><ul><ul><ul><li>Possible extension to U.S. </li></ul></ul></ul><ul><ul><li>European region </li></ul></ul>
    47. 47. International considerations Section 4 1 From the PwC Global Equity Incentives Survey <ul><ul><li>ESPPs increasing in China although companies face strict compliance regulations </li></ul></ul><ul><ul><li>No firms operating solely in Hong Kong offer ESPPs </li></ul></ul><ul><ul><li>Companies offering ESPPs must take the following steps: </li></ul></ul><ul><ul><ul><li>File foreign exchange quota and application for opening special account with State Administration of Foreign Exchange (SAFE) </li></ul></ul></ul><ul><ul><ul><li>Use the registered special account for all fund transfers </li></ul></ul></ul><ul><ul><li>Stringent Fines: Violations result in fine of 30% to five times the value of foreign exchange evaded </li></ul></ul><ul><ul><li>14% of companies with employees in China offer an ESPP in 2009, compared to 7% in 2007 and 10% in 2006 </li></ul></ul><ul><ul><li>In addition there are low participation rates 1 </li></ul></ul><ul><ul><li>Most companies have participation rates of between 0%-25% </li></ul></ul><ul><ul><li>China and Hong Kong </li></ul></ul>
    48. 48. Section 5 Questions & answers
    49. 49. Section 6 Contact information
    50. 50. Contact information <ul><ul><li>PricewaterhouseCoopers LLP </li></ul></ul>Section 6 [email_address] (267) 330 – 6331 Geoff Hammel [email_address] (267) 330 – 6274 Amy Lynn Flood
    51. 51.  © 2009 PricewaterhouseCoopers LLP. All rights reserved. &quot;PricewaterhouseCoopers&quot; refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document was not intended written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state local tax penalties.

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