The A to Z of ESPPs. Session C2: May 24, 2017, 2:15 3:30 pm

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1 The A to Z of ESPPs Session C2: May 24, 2017, 2:15 3:30 pm Madori Playford, Outsourcing Manager, Stock & Option Solutions, Inc. Paul Yi, Senior Manager, Financial Reporting, Cornerstone OnDemand, Inc. Robyn Shutak, Senior Director, Programs & Member Services, Global Equity Organization

2 CPE Credits Continuing Professional Education (CPE) Credits are available! You will receive one (1) CPE credit after attending this session. You must attend the entire session to be eligible. In order to earn the available credit(s) for this session, you must see the room monitor before and after the session to get checked-in and out of the session. Electronic certificates will be ed to you a few weeks after the conference with the cumulative number of credits earned Solium is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. Web site:

3 Understanding ESPPs: The Basics Employee Stock Purchase Plans Programs where participants have an opportunity to purchase shares of company stock (generally) at a discount and (typically) via payroll deductions using after-tax income Types of plans Qualified (Section 423 plan) Purchase company stock at a discount, postpone recognition of tax on the discount until shares are sold Significant regulatory requirements and administrative complexities Non-qualified Purchase company stock, no tax advantage available (taxes due at purchase) Fewer regulatory requirements and easier to explain to participants

4 Understanding ESPPs: The Basics Enrollment Participants apply to enroll in the plan and indicate on their application the amount of their paycheck they would like to contribute Certain types of compensation may be excluded from contributions Generally, there are limitations on the maximum contribution amounts allowed and the number of shares allowed for purchase Deductions then commence for participants until the purchase date (the day on which the company stock is actually bought). Purchase Accumulated funds are used to purchase company shares on the participants behalf on the last day of each purchase period

5 Understanding ESPPs: The Basics Key Dates and Terms Offering periods can be either consecutive or overlapping; those in the latter category will often have different purchase prices because of their staggered purchase dates. Most offering periods have several purchase dates that come at the end of several purchase periods, such as a plan with a three-year offering period that is comprised of four purchase periods that end in four purchase dates.

6 Plan Design Consider the advantages of having an Omnibus plan that allows for a 423 Qualified Plan for the US employees and Country Specific Non-Qualified Plans for your international population Includes both a Section 423 and non-section 423 component Make plan as broad as possible Non-Section423 component allows for different eligibility and features in other countries review each entity and compliance issues in advance Determine if separate offering desired May exclude part-time employee participation Allows exclusion of some countries Avoids tainting entire ESPP Offering Ensure Board resolution outline any separate offerings

7 Plan Design Review if shareholder approval required; shareholder advisory firm considerations Consider workforce demographics when designing a plan Ease of enrollment Country specific registration or exchange control regulations Access to technology Quick sale provision Price of stock compared to local wages Rollover of contributions to next offering period

8 What Features Does Your Company s Plan Have? Six-month offering periods with a lookback 15% discount Contributions may not exceed 10% of base earnings Contribution made with after-tax dollars Automatic enrollment into next offering period until withdrawal from plan Full-time employees are eligible

9 General Administration Close coordination between internal and external parties is essential Broker Transfer agent U.S. payroll and local payroll in each country the plan is offered Financial reporting Tax Develop checklists for following the processes Enrollment checklist Contribution checklist Processing the purchase checklist

10 Administrative Challenges Availability and accuracy of global employee data Understanding and executing plan parameters Reconciling contributions Excess contributions, e.g., $25K limit Currency conversions

11 Any Lessons Learned from Administering Your Plan? Introducing the plan globally can be challenging Regulations Foreign exchange fluctuations Tax obligations

12 Enrollment Any employee that is eligible may participate in the plan provided the employee takes the required steps to enroll Employee communication and education is vital for a successful program Online enrollment can make the process much easier for both employees and the company Enrollment of non-us employees through an on-line or IVR system may not create a binding contract

13 What is Your Enrollment Process? Communication from HR prior to the opening of new window to enroll Only eligible employees will be able to enroll using Shareworks After the enrollment window has ended, payroll team is notified of election percentages The ESPP contributions are deducted from the employee s paycheck until the purchase period

14 Processing the Purchase Create a purchase checklist that includes all the steps Work with Payroll to get employee contributions in advance of the purchase Reconcile contributions between the database and the file from Payroll On the purchase date process the purchase Determine if anyone exceeded the IRS or share limits Reconcile the purchase with the original contribution reconciliation Deliver the shares

15 What is Your Standard Purchase Process? Payroll team provides the ESPP contribution amounts ESPP contributions amount are loaded into Shareworks On the purchase date, Solium sends us a purchase report We verify all amounts on the purchase report We notify Solium to make the purchase Shares are deposited into participant s Shareworks accounts

16 Key Dates The dates you need to know when managing an ESPP are the Offering or Subscription Date(s), the Purchase Date and the Enrollment Dates Key Terms Offering or Subscription this is the first day of an Offering of note there may be one or more purchase periods in an offering period Purchase Date the day contributions are use to purchase shares Contributions this is a percentage of an employee s paycheck withheld to purchase shares on the purchase date Enrollment this is period of time in which an employee can enroll in the ESPP and designate the percentage of income to withhold

17 Employee Communications How successful your plan is depends heavily on how well the plan is communicated to employees Double-barreled advantage of a discounted price and a lookback Tax liability is deferred until sale with an additional tax advantage if the holding period is met Dollar cost averaging is the stock price drops more shares can be purchased thus increasing the gain when the stock price goes up Participating is an easy, efficient, painless and rewarding way to pursue a disciplined saving plan and build your financial resources for the long term

18 How Do You Communicate Your ESPP to Employees? HR sends out reference materials including: Solium Quickstart Guide FAQ S-8 Prospectus ESPP country information HR presents a summary to employees that want additional information

19 Global Equity Insights Study a success story for market intelligence since companies including the largest global corporations 90% with a market capitalization above USD 1 billion at year-end 2016 (the top 8% exceeding USD 100 billion) 60% of the companies generated revenues above USD 5 billion in 2016 National leading companies from 17 countries around the world Special focus on North America (51%) and Europe (34%) Representative sample across 10 industries

20 Share discount plans are the most prevalent SPP type Matching plan (in shares) Matching plan (in cash) Share discount plan SPP types (in % of companies) Free shares Other Share discount plans are the dominant SPP type around the world. However, there are considerable regional differences. While North American companies predominately use share discount plans (63%), European companies prefer the use of matching plan types (45%) as well as share discount plans (48%). Total Europe North America Rest of World

21 Companies seem to face challenges with actual SPP participation Total Europe SPP participation rate (in % of eligible participants) The actual participation rate in Europe is just below 40% and in North America less than 30%. The slightly higher participation rate outside Europe and North America (43%) may result from a more frequent use of free share plans. North America 28 Rest of World 43

22 Regulatory requirements and costs are the main obstacles to SPP implementation Obstacles to SPP implementation (in % of companies) Regulatory requirements Costs Implementation process IT Implementation Participation acceptance Regulatory requirements are particularly seen as an obstacle by European companies, with 38% of them considering these as a very high obstacle to SPP implementation. 21% of the European and North American companies also see costs as big obstacle. Share usage/ dilution Shareholder concerns very low low moderate high very high

23 Share ownership is the most important objective for SPP implementation SPP objectives ranked "very high" (in % of companies) Share ownership Identification with the company Employee engagement Motivation Profit / Performance Sharing Besides share ownership, identification with the company and employee engagement are highly ranked SPP objectives. In Europe, identification with the company is the most important objective; in North America it is share ownership. Retention Stay competitive paywise Strategy Best market pay

24 More than half of the surveyed companies have implemented SPP plans Total Europe SPP implementation (in % of companies) Companies seem to be aware of the beneficial impact of SPP since more than half have implemented such plans. There are great regional differences: European and American companies show a higher implementation rate than companies in other economic regions. North America 62 Rest of World 38

25 Almost half of the companies offer SPP to over 75% of their employees >75% 51-75% 11 SPP eligibility (in % of companies) Companies often use SPP to establish a comprehensive equity culture within their organization. Almost half of companies offer SPP to over 75% of their employees % <25% Total Europe North America Rest of World

26 Good communication is key for high SPP participation Criteria for high SPP participation (in %) Good communication Clear plan design/rules One essential aspect positively affecting SPP participation is good communication, which was rated as very important criterion for a high SPP participation rate by 64% of companies. A clear plan design and clear plan rules as well as a user-friendly platform/technology were also rated as very important criteria. User-friendly platform/technology very low low moderate high very high

27 Companies use SPP participation rate to measure plan satisfaction SPP satisfaction measures (in % of companies) Participation rate Attrition rate Employee surveys Focus groups Manager/executive feedback We don t measure this Total Europe North America Rest of World Satisfaction with SPP plans is an important topic and survey results inidcate that companies measure employee satisfaction in different ways. With 42%, participation rate is the most popular satisfaction measure. There are no significant differences across economic regions.

28 European companies grant higher discounts than North American companies Total Share discount levels (in % of companies) Looking at the discount levels of share discount plans reveals that European companies tend to grant higher discounts than North American companies. Europe North America % of European companies use discounts of 16% or more while none of the North American companies provide discounts this high (likely due to a discount limit of 15% for tax qualified plans in the US). 0-5% 6-10% 11-15% 16-20% > 20%

29 Lookback periods are most popular among North American companies Application of a lookback period (in % of companies) Total Europe North America Rest of World To determine the price at which participants can purchase shares, companies can apply a lookback period during which the lowest purchase price determines the final purchase price. Having a lookback period in place is significantly more popular among North Ameri-can companies (46%) than among their European peers (16%). No Yes

30 Questions?

31 Contact Us Madori Playford Outsourcing Manager Stock and Option Solutions Paul Yi Senior Manager, Financial Reporting Cornerstone OnDemand, Inc. Robyn Shutak Sr. Director, Programs and Member Services Global Equity Organization