Mama Mia! Cooking Up a Big Batch of ESPP

Transcription

1 Mama Mia! Cooking Up a Big Batch of ESPP Jon Burg, Partner, Radford Emily Cervino, Vice President, Fidelity Stock Plan Services Barry Kuhn, Manager - Equity Administration, Discovery Communications Tom Paleka, Vice President - Compensation, A.J. Gallagher

2 Menu Introducing our celebrity chefs Researching recipes understanding current data The main dish flavors of ESPP Adjustments and substitutions predictive analytics

3 Arthur J. Gallagher & Co. Company Background: Arthur J. Gallagher & Co. plans, designs, and administers a full array of customized property/casualty insurance and risk management programs AJG also furnishes risk management services including claims and information management, risk control consulting, and appraisals to help clients reduce their cost of risk In addition, the company assists clients in all areas of employee health/welfare and retirement plans, including plan design, funding, and administration Annual Revenue Total Employees Key Statistics $4.3B 25K Employees Receiving Equity 3.5% Stock Delivered Globally In 15 countries % U.S. Based 65% % Global (Non-U.S.) 35% Award Types: Stock Options Restricted Stock/Units Performance Employee Stock Purchase Plan Yes Yes Yes Yes

4 Discovery Communications Company Background: Discovery Communications (Nasdaq: DISCA, DISCB, DISCK) is the leader in global entertainment reaching 3 billion cumulative subscribers in more than 220 countries and territories. Discovery satisfies curiosity, entertains, and inspires viewers with high-quality content through global brands, led by Discovery Channel, TLC, Investigation Discovery, Animal Planet, Science and Turbo/Velocity, as well as U.S. joint venture network OWN: Oprah Winfrey Network, and through the Discovery Digital Networks portfolio, including Seeker and SourceFed. Discovery owns Eurosport, the leading pan-regional sports entertainment destination across Europe and Asia-Pacific. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education. For more information, please visit: Annual Revenue Key Statistics $6.4B Total Employees 6.7K Employees Receiving Equity 1.5K Stock Delivered Globally In 26 countries % U.S. Based 52% % Global (Non-U.S.) 48% Award Types: Stock Options Restricted Stock/Units Performance Employee Stock Purchase Plan Yes Yes Yes Yes 5

5 ESPP Trends In comparing 2014 to 2016, there is a slight trend to the positive, with more tax qualification, more 15% discounts, and more look-backs. Offering Type Price Type Discount Sales Restriction Fidelity/Radford 2016 ESPP Data Analysis study.

6 ESPP Participation Trends Consistent with expectations, as plan design improves, so does participation. Participation rates grew more profoundly than plan design improvements. Participation Rates Participation by Plan Design Fidelity/Radford 2016 ESPP Data Analysis study.

7 Nonqualified ESPP Participation Trends Nonqualified plans are trending toward match provisions rather than discount. Fidelity/Radford 2016 ESPP Data Analysis study.

8 Plan Design by Industry Plan design varies by industry. Purchase Price Type Sale Restriction Discount Due to rounding, totals may not add to 100%. Fidelity/Radford 2016 ESPP Data Analysis study.

9 RECIPE: INGREDIENTS: 3 month offering period 5% discount Look-back Full customization for AUS (tax advantaged plan) Investigating taxadvantaged plan for UK FOR : Employee Stock Purchase Plan FROM THE KITCHEN OF: A.J. Gallagher x COOK TIME: 9 years SERVES : 22% U.S.; 8% O.U.S. Mix all ingredients well. Roll out global ESPP to U.S., UK, Canada, Australia, Bermuda, New Zealand, plus second plan in Australia.

10 Tasting Notes from Arthur J. Gallagher & Co. Fairly complex process to launch unique tax advantaged plans by country o Multiple parties (internal & external): Stock Admin, Payroll, HR, Legal, Finance, Tax o Communication is key! o Trusts may be involved and may need multiple partners o Administrative complexity with multiple plans offered in same enrollment window Huge effort to stay educated on tax implications, and to communicate those to employees Philosophy is to assess through fairness prism; while strive for best plan design, want to maintain parallel opportunity

11 RECIPE: INGREDIENTS: 3 month offering period 15% discount End Price Pinch of customization for bonuses One-year holding period FOR : Employee Stock Purchase Plan FROM THE KITCHEN OF: Discovery Communications COOK TIME: 6 YEARS SERVES : 24% U.S.; 6% O.U.S. Mix all ingredients well. Roll out ESPP to Argentina, Australia, Brazil, Colombia, Denmark, Finland, France, Hong Kong, Hungary, India, Italy, Jersey, Korea (South), Mexico, Netherlands, Norway, Poland, Portugal, Singapore, Spain, Sweden, Switzerland, Taiwan, United Arab Emirates, United Kingdom, U.S.

12 Tasting Notes from Discovery Communications Italy Quarterly Enrollment Process is paperbased, and the process is manual for our thirdparty service provider UK S431 process for tax withholding Annual filings by employees with outside holdings in some countries (i.e. India, Spain)

13 Predictive Analytics ESPP design decisions should be made with clearly defined objectives since the variations are endless Companies may need to find the appropriate balance between two stated objectives that can change between being in alignment or partially at odds depending on the design decision o For example, foster a long-term shareholder outlook and maximize participation would be in alignment for using a longer offering period, but at odds with regard to post-purchase holding requirements Using market data to model the potential impact of a design feature on employee behavior (e.g., participation, contribution, and holding) allows a company to make more informed, data driven decisions

14 Predictive Analytics Example Company ABC currently offers a 423 Safe Harbor program (i.e., 5% with no look-back) and is considering expanding to 15% with a 6-month look-back Participation rate is 25% in U.S. and 15% O.U.S. o Average contribution is $4,000 in U.S. and $3,000 O.U.S. What potential impact might this plan design have on the key measures for an ESPP? o o o o Participation rate Estimated contributions Compensation expense Share usage

15 Predictive Analytics Example (cont.) The market data for 6-month programs with 15% discount and look-back: Scenario US Rate Non-US Rate Blend for ABC Description Low 43% 24% 35% Based on the 25 th percentile Target 56% 42% 50% Based on the 50 th percentile High 66% 52% 60% Based on the 75 th percentile Progressive 43% - 56% 24% - 42% 35% - 50% Increasing overall rate from 35% (Low) to 50% (Target) over 3 years Following table provides a reasonable range of outcomes: Participation Rate Scenario Average Contribution Rate Estimated Contributions (Annual) Share Projection (Annual) Compensation Expense (Annual) Low 7% US / 5% Non-US $16.8M 1.7M $ 6.3M Target 7% US / 5% Non-US $23.5M 2.4M $ 8.8M High 7% US / 5% Non-US $28.6M 2.9M $10.7M Progressive 7% US / 5% Non-US $20.4M 2.1M $ 7.6M

16 Amuse-Bouche: Employee Selling Behavior 60% 50% 40% 30% 20% 10% 0% 50% 43% 7% Holders Partials Sellers 60% 50% 40% 30% 20% 10% 0% 51% 45% 4% 48% 6% 46% 47% 46% 51% 41% 9% 8% 0% 5% 10% 15% Holders Partials Sellers Analysis population includes more than 365,000 employees from 119 Fidelity clients Employee behavior analyzed as of June 2016 Proportion of sellers is the highest among plans with no discount and plans with a higher discount of 15% The proportion of holders is highest when the discount is 5%

17 Plan Design Impacts Holding Behavior and Participation Rate ESPP Type Purchase Frequency Discount Price Type Holders Participation Rate Qualified Monthly 5% End Price 49% 15% Qualified Quarterly 5% End Price 48% 8% Qualified Semi-Annual 5% End Price 45% 16% Qualified Semi-Annual 15% Lookback 43% 24% Qualified Quarterly 15% End Price 42% 27% Qualified Semi-Annual 15% End Price 40% 29% Qualified Quarterly 15% Lookback 32% 28% Qualified plans with 5% discount have a higher proportion of holders compared to plans with a 15% discount Participation rates at plans with a 15% discount are almost twice that of plans with a 5% discount Despite the lower proportion of holders, higher participation rates at plans with 15% discount translates to more employee shareholders

18 Thank You Jon Burg Radford Barry Kuhn Discovery Communications Emily Cervino Fidelity Stock Plan Services Tom Paleka A.J Gallagher FOR GEO ANNUAL CONFERENCE ATTENDEES ONLY. Aon Radford, A.J. Gallagher, Discovery Communications, and Fidelity Investments are not affiliated. Fidelity Stock Plan Services, LLC

19 Thank You Thank you for attending GEO s 18 th Annual Conference in Rome. We hope you enjoyed this session. If you require CPE Credit, don t forget to Sign Out Two ways to give us your feedback on this session o Mobile app o Paper surveys available at the door