Stock Awards Keeping Pace with Equity Alternatives

Transcription

1 Stock Awards Keeping Pace with Equity Alternatives Thursday, April 27, :00pm 5:00pm Virginia L. Gibson White & Case LLP

2 Goals of Equity Compensation Recruit Motivate Retain Culture 1

3 The Rise of Options Description: At no cost to the employee, he or she receives the right to purchase shares of company stock at a specified price. The employee receives a gain at exercise when the fair market value of stock increases over the exercise price. Historically attractive because: Favorable accounting treatment Strong stock market Start-up culture encouraged employee ownership No cash outlay by company 2

4 Stock Options Accounting Treatment: Treated as an expense (FAS 123). Performance Correlation: Moderate. Retention Value: High, if not underwater options. Dilution: Moderate. Tax Consequences: Employee: ISO taxation is deferred until sale, unless a disqualifying disposition occurs. For an NQSO, the spread is taxable at exercise. Company: A deduction for an ISO is not available, unless a disqualifying disposition occurs. For an NQSO, the spread is deductible at exercise. 3

5 The Demise of Options? Stock market downturn Corporate scandals Accounting treatment under FAS 123 Retention value Institutional shareholder objections Shareholder approval requirements 4

6 Accounting Implications FAS 123 Effective: Public companies: first quarter of first FY after Nonpublic companies: first quarter of first FY after Applies to almost all employee stock plans Value estimated at the time of grant Value expensed over the vesting or forfeiture period 5

7 The Alternatives Unrestricted Stock Award Restricted Stock Restricted Stock Units (RSUs) Stock Appreciation Rights (SAR s) Employee Stock Purchase Plan (ESPP) Derivatives Deferred Compensation 6

8 Unrestricted Stock Award Description: The grant of stock at no cost to the employee. Generally, no restrictions are imposed on the grant or receipt of the stock. Accounting Treatment: Full FMV expensed immediately. Performance Correlation: Low. Retention Value: Low. Dilution: High. Tax Consequences: Employee: Full FMV taxable at grant. Company: Full FMV deductible at grant. 7

9 Unrestricted Stock Award Taxation Assumptions 10 shares FMV at Grant: $10 FMV at Sale: $30 Employee Taxation Grant: 10 shares x $10 = $100 ordinary income Sale: 10 shares x $30 = $300 - $100 = $200 capital gain Company Taxation Deduction at Grant: $100 8

10 Restricted Stock Description: Grant of stock to employees at no cost with either timebased or performance-based vesting restrictions. Shares are forfeited if vesting requirements are not satisfied. Employee has some rights as shareholder (i.e., voting and dividends) during the vesting period. Accounting Treatment: Full FMV expensed over the vesting period. Performance Correlation: Moderate to high. Retention Value: Moderate to high. Dilution: Moderate to high. Tax Consequences: Employee: Full FMV taxable at vesting; capital gain taxed at sale. Company: Full FMV deductible at vesting. 9

11 Restricted Stock Taxation Assumptions 10 shares FMV at Grant: $10 FMV at Vesting: $20 FMV at Sale: $30 Employee Taxation Grant: $0 Vesting: 10 shares x $20 = $200 ordinary income Sale: 10 shares x $30 = $300 - $200 = $100 capital gain Company Taxation Deduction at Vesting: $200 10

12 Restricted Stock Units (RSUs) Description: The right to receive, in cash or in shares, the value of stock from the grant date to the exercise date at no cost to the employee. Vesting requirements generally apply. Accounting Treatment: Variable until vesting/exercise. Performance Correlation: Moderate. Retention Value: Similar to options. Dilution: None. Tax Consequences: Employee: Full FMV taxable at vesting/exercise. Company: Full FMV deductible at vesting/exercise. 11

13 Restricted Stock Units (RSUs) Taxation Stock-Only RSUs Assumptions: Grant of 10 RSUs with vesting requirement FMV of share at grant: $10 FMV of share at vesting/exercise: $20 FMV of shares at sale: $30 Employee Taxation: Grant: $0 Vesting/exercise: 10 RSUs x $20 = $200 Sale: 10 shares x $30 = $300 - $200 = $100 capital gain Company Taxation: Deduction at vesting/exercise: $200 12

14 Restricted Stock Units (RSUs) Taxation Cash-Only RSUs Assumptions: Grant of 10 RSUs with vesting requirement FMV of share at grant: $10 FMV of share at vesting/exercise: $20 Employee Taxation: Grant: $0 Vesting/exercise: 10 shares x $20 = $200 ordinary income No capital gain Company Taxation: Deduction at vesting/exercise: $200 13

15 Stock Appreciation Rights (SARs) Description: The right to receive, in cash or in shares, the increase in value of stock from the grant date to the exercise date at no cost to the employee. Vesting requirements generally apply. Accounting Treatment: Variable until vesting/exercise. Performance Correlation: Moderate. Retention Value: Similar to options. Dilution: None. Tax Consequences: Employee: Spread taxable at vesting/exercise. Company: Spread deductible at vesting/exercise. 14

16 Stock Appreciation Rights (SARs) Taxation Stock-Only SARs Assumptions: Grant of 10 SARs with vesting requirement FMV of share at grant: $10 FMV of share at vesting/exercise: $20 FMV of shares at sale: $30 Employee Taxation: Grant: $0 Vesting/exercise: 10 SARs x $20 = $ SARs x $10 = $100 spread = $100 ordinary income (which equates to receipt of 5 shares at $20 FMV) Sale: 5 shares x $30 = $150 - $100 = $50 capital gain Company Taxation: Deduction at vesting/exercise: $100 15

17 Stock Appreciation Rights (SARs) Taxation Cash-Only SARs Assumptions: Grant of 10 SARs with vesting requirement FMV of share at grant: $10 FMV of share at vesting/exercise: $20 Employee Taxation: Grant: $0 Vesting/exercise: 10 shares x $20 = $200 - $100 = $100 ordinary income No capital gain Company Taxation: Deduction at vesting/exercise: $100 16

18 Employee Stock Purchase Plans (ESPPs) Description: Employee savings plan through payroll deductions whereby shares are purchased at a discount on set dates, typically every six months. The purchase price of the shares is typically 5%-15% less than the fair market value of the shares at the beginning of the purchase period or at the end of the purchase period, whichever is less. Accounting Treatment: Under FAS 123, any discount subject to expensing. Performance Correlation: Low to moderate. Retention Value: Moderate. Dilution: Moderate. Tax Consequences: Qualified Employee: Tax upon sale at capital gains rate, unless disqualifying disposition. Company: No deduction, unless disqualifying disposition. Non-qualified Employee: Spread taxable at exercise. Company: Spread deductible at exercise. 17

19 Employee Stock Purchase Plan (ESPP) Taxation Section 423 Plan Assumptions: FMV at grant: $10 FMV at Purchase: $20 Purchase Price: $8.50 FMV at Sale: $30 Employee Taxation: Grant: $0 Purchase: $0 Sale: Ordinary Income: $10 - $8.50 = $1.50 Capital Gain: $30 - $10 = $20 Company Taxation: No deduction unless disqualifying disposition 18

20 Employee Stock Purchase Plan (ESPP) Taxation Non-Qualified Stock Purchase Program Assumptions: FMV at Grant: $10 FMV at Purchase: $20 Purchase Price: $8.50 FMV at Sale: $30 Employee Taxation: Grant: $0 Purchase: $20 - $8.50 = $11.50 ordinary income Sale: $30 - $20 = $10 capital gain Company Taxation: Deduction at exercise: $

21 Derivatives Description: The right to receive a cash payment based on the increase in value of a market, industry or stock index. Vesting restrictions apply before the employee may exercise his or her right. Accounting Treatment: Variable until vesting/exercise. Performance Correlation: Low. Retention Value: Moderate. Dilution: None. Tax Consequences: Employee: Spread taxable at vesting/exercise. Company: Spread deductible at vesting/exercise. 20

22 Derivatives Taxation Assumptions: Grant of 10 derivative units FMV of derivative units at grant: $10 FMV of derivative units at vesting/exercise: $20 Employee Taxation: Grant: $0 Vesting/exercise: 10 derivative units x $20 = $200 - $100 = $100 ordinary income Company Deduction: Deduction at vesting/exercise: $100 21

23 Deferred Compensation Description: Qualified or non-qualified rights to payment of cash or stock at a later date. Accounting Treatment: Full value expensed at grant. Performance Correlation: High if performance related. Retention Value: Moderate to high. Dilution: None if cash bonus; high if stock grant. Tax Consequences: Employee: Generally deferred until time of payment. Company: For qualified plans, full value deductible at grant. For nonqualified plans, full value generally deductible at the time of payment. 22

24 International Considerations Tax Securities Labor Currency Exchange Control 23

25 Global Regulatory and Tax Issues (1) Employment Labor Concerns Communications (2) Regulatory Foreign Exchange Data Protection (3) Tax Issues Employee Tax Treatment Social Insurance Contributions Withholding and Reporting Employer Tax Treatment Tax-Favored Programs 24

26 Employment Labor Concerns Labor union or works councils Selection of participating employees Securities Compliance Part-time employees Vesting for terminated employees Program benefits and base pay Restriction by law 25

27 Employment Communications Local disclosure requirements Necessity of modifications by local laws Electronic distribution Translation 26

28 Regulatory Securities Compliance Filing requirement with the local securities authorities Exceptions for equity compensation programs Cashless exercise programs The E.U. Prospectus Directive (Dec. 31, 2003) 27

29 Regulatory Foreign Exchange Transfer of payroll deductions by the local subsidiary Conversion and transfer of local currency by employees Conversion and transfer of local currency by the local subsidiary Mandatory cashless exercise Continuous monitoring of developments in local rules 28

30 Regulatory Data Protection Recent development of data protection laws in the world An employee s written consent to transfer of personal data Registration and notification requirements Agreements with third parties to protect data 29

31 Tax Issues Employee Tax Treatment Tax consequences of grant Tax consequences of vesting Tax consequences of exercise Tax consequences of subsequent sale of shares Expatriates and third country nationals Withholding and reporting obligation 30

32 Tax Issues Social Insurance Contribution Imposition of social insurance tax on the spread Possibility of modification Withholding and Reporting Withholding of income tax and rates Employee s reporting obligation Adopting procedures for withholding and reporting 31

33 Tax Issues Employer Tax Treatment Tax consequences of the local subsidiary s extension of program Tax consequences of the local subsidiary s reimbursement (charge-back) to the parent Tax-Favored Programs The availability of special tax-favored program Possibility of modification or restriction of the program 32

34 Questions? Thank you for your participation 33