The Challenges of Designing Global Equity Plans

Transcription

1 The Challenges of Designing Global Equity Plans Pete Lupo Managing Director, Pearl Meyer & Partners Aalap H. Shah Vice President, Pearl Meyer & Partners

2 Speakers Suzanne Hopgood, Director, NACD Board Advisory Services; Director and Chair, Nominating & Governance Committee, PointBlank Solutions, Inc. and Acadia Realty Trust; President and CEO, The Hopgood Group, LLC. Peter Lupo, Managing Director, Pearl Meyer & Partners Pete Lupo has over 20 years experience with executive compensation and benefits programs, including benchmarking of total compensation programs, annual and long-term incentive compensation design, sales compensation and total reward studies Aalap Shah, Vice President, Pearl Meyer & Partners Aalap Shah focuses on incentive plan design, pay-for-performance alignment, compensation benchmarking, and special compensation programs for IPO and M&A transactions. 2

3 Introduction Designing equity programs covering executives and employees of US companies has become much more complex over the past several years due to changes in accounting treatment, share usage, governance concerns, etc. The challenges of designing effective global equity programs raises complexity to a whole new level but the advantages of a successful program can be tremendous This presentation highlights the key issues that companies need to consider as they evaluate their global equity programs and presents a roadmap for the design process 3

4 Historic Global Approach The majority of US public companies with global equity plans have a US centric approach Most programs are based on US equity incentive practices that apply to all global executives regardless of location Intended to ensure the executive compensation program was internally equitable Facilitated global transfers Recognized that many global companies are US based Simplified the administration of the program and allowed it to be handled at a central location Acknowledged that appropriate compensation benchmarks may not exist in certain parts of the world 4

5 Global Equity Programs Can Be Highly Effective But Challenges Remain Pros Mitigates the feeling of geographic separation from headquarters Treats executives and employees equitably on a global basis Builds teamwork and a shared mission Aligns executives and shareholders interest on a global basis Aligns global goal setting Allows for a uniform executive compensation program globally Mitigates pay issues for transferred executives Cons May wind up with a US centric approach to equity grants that aren t appreciated / understood in parts of the world Can provide disproportionately large grants to executives in less developed countries Virtually impossible to design a program that is tax efficient in all parts of the world Start-up costs can be very high and may make a new program unattractive Increases ongoing administrative costs 5

6 Current Global Equity Practices

7 Global Equity Plan Challenges Majority of companies cite compliance and/or administration as their most pressing challenges 100% 80% Challenges to Global Equity 2007 All companies 2007 Based in Europe 60% 40% 20% 0% Compliance Adminstration Global Grant Guidelines Communications Cross-country Coordination Cross-departmental Coordination Other Source: Pricewaterhouse Coopers 7

8 Plan Types Although service based awards are currently the most prevalent, European markets have a history of granting performance and market awards 100% 80% Prevalence of Plan Types 2007 Companies with US employees 2007 Based in Europe 60% 40% 20% 0% Service Performance Market Source: Pricewaterhouse Coopers 8

9 Performance/Market Metrics Market based metrics are more prevalent in Europe than in other regions 50% 40% Prevalence of Performance/Market Metrics 2007 All companies 2007 Based in Europe 30% 20% 10% 0% Revenue/Growth EPS EBIT Return Metrics Cash Flow Stock/share price TSR Relative Stock price/tsr Source: Pricewaterhouse Coopers Other 9

10 Global Pay Practices Differ

11 Differing Global Pay Practices Can Affect Equity Plan Design One of the challenges of designing global equity programs is understanding how the mix of pay differs globally US executive compensation programs rely on a significant amount of leverage in the annual and long-term incentive programs as compared to programs in other countries US incentive programs provide progressively more pay opportunities as salaries increase Creating a US centric approach to global equity designs may: Result in total pay levels that exceed the intended targets Create a pay mix that is inconsistent with local country practices 11

12 Incentive Eligibility US market companies have a lower base salary eligibility standard than non-us market companies Nevertheless, annual incentive eligibility is more in step with US practice than equity incentive eligibility Surprisingly, Western European countries (subset of EMEA) have a higher base salary eligibility threshold than other geographies $140,000 Annual Incentive Eligibility - Minimum Base Salary $140,000 Equity Incentive Eligibility - Minimum Base Salary $120,000 $120, x Base Salary ($USD) $100,000 $80,000 $60,000 $40, x 1.2x 1.9x Base Salary ($USD) $100,000 $80,000 $60,000 $40, x 1.4x $20,000 $20,000 $0 US Americas Asia-Pacific EMEA $0 US Americas Asia-Pacific EMEA 12

13 Divergence of Annual Incentives Annual incentive divergence (difference between US and non- US practices) increases as base salaries increase Divergence is significant at higher salary levels Divergence of US and Non-US Annual Incentive Percentages US Non-US Annual Inc. % Base Salary 13

14 Divergence of Equity Incentives For equity incentives, divergence commences earlier and delta between US and non-us levels is more pronounced Non-US equity incentive levels do not substantially increase as base salary increases Divergence of US and Non-US Equity Incentive Percentages US Non-US Equity Incentive % Base Salary 14

15 Implications for Global Equity Designs Applying US centric incentive levels to non-us regions will, in many cases, lead to a misalignment with local market practices US market companies tend to have lower base salaries and higher incentive levels than Non-US market companies A discount/premium is often times applied to US incentive levels to combat this misalignment Has the pulling a number out of a hat feel If discount/premium is applied uniformly, does not account for position s responsibility and complexity The following case study demonstrates the potential pitfalls of a centralized incentive approach 15

16 Case Study

17 Case Study Large multinational manufacturing organization ( Company ) operating in multiple geographic regions Americas Asia-Pacific EMEA (Europe, Middle East, and Africa) Organization has set career bands across all geographies, which include both annual and long-term incentive targets Target annual incentive percentages vary within each band However, target equity incentive opportunity is set by band and applied consistently across all geographies Data analysis consisted of fifty-two executives across five career bands and eleven countries Base salaries ranged from $92,000 - $477,000; with a median of $217,061 17

18 Annual and Equity Incentives vs. Market Company s target annual incentives are closer to market medians in the US than in the non-us regions Primarily the result of the Company s annual incentive targets being US centric The opposite is true with respect to equity incentives Company used a reduced amount that would be more applicable to international levels; thereby creating a shortfall in the US 50% Annual Incentive $204,000 Salary Point 50% Equity Incentive $204,000 Salary Point Percent of Base Salary 40% 30% 20% 10% 39% 35% 40% 38% 37% 30% 30% 29% Percent of Base Salary 40% 30% 20% 10% 36% 44% 31% 27% 40% 34% 33% 30% 0% US Americas Asia-Pacific EMEA 0% US Americas Asia-Pacific EMEA Company Target Market Median Company Target Market Median 18

19 Annual and Equity Incentives vs. Market (cont d) When combining locally benchmarked base salaries with non-local annual and equity incentive targets, greater differentials from market appear 50 Percentage Point Differential from Market Median Annual Incentive 40 Percentage Point Differential from Market Median Equity Incentive Percentage Point Differential Percentage Point Differential US Americas Asia-Pacific EMEA -40 US Americas Asia-Pacific EMEA 19

20 Developing a Global Equity Approach

21 Developing a Global Equity Approach More and more companies are starting to consider local country practices and customization in designing global equity incentive plans Increasing recognition that tailoring pay to local country practices may be more effective in motivating, attracting and retaining local country executives Pay practices around the world are starting to become more like those in the US, although there are still major differences Customizing executive pay to local country practices might even reduce compensation expense Recognizes that equity grant values outside of the US are lower but still are competitive at the local country level Data on global pay practices, although far from perfect, is more available and better developed than in the past 21

22 Decentralizing the Global Equity Program A company can minimize the task of decentralizing a global equity program by addressing a number of key issues and concepts Focus on Local Grant Practices Develop award levels based on local country or regional practices Develop grant levels for a country or a select group of countries where the company has a significant amount of executives Two primary strategies: country based and region based Companies may also find that groupings based on similar incentive levels - not geography - can be more effective Don t force the data. For key areas where no or poor data exists, rely on hiring practices to develop equity grant data 22

23 Decentralizing the Global Equity Program (cont d) Select Equity Vehicles If currently not in place, develop an omnibus equity plan Stock options are still favored globally, however restricted stock/units and performance plans are gaining in prevalence 100% 88% Prevalence of Types of Equity Awards Offered Outside the US 80% 60% 40% 66% 47% 47% 20% 11% 6% 0% Stock Options Restricted Stock/Units Performance Plan Stock Purchase Plan Stock Settled SARs Phantom Stock Plan Source: NASPP/Deloitte Tax LLP 23

24 Decentralizing the Global Equity Program (cont d) Manage Share Usage Establish a pool of shares to be used for global grants The changes in the accounting practices for equity programs maintained by US companies have encouraged companies to use less shares globally Eligibility levels should take both salary and relative importance/complexity of position into consideration Explore usage of full-value equity vehicles As in the US, many multinationals are facing the dual pressures of expensing and share dilution Pro-rate grant levels based on available shares if needed 24

25 Decentralizing the Global Equity Program (cont d) Understand Related Issues Is a securities registration necessary? Are foreign currency exchange transactions limited in any way? When is an employee taxed? A majority of organizations do not consider the local country tax obligation before implementing an equity program Is there a tax advantage/disadvantage of charging plan costs to local subsidiary? Are long-term incentives considered in severance? Will participants be legally entitled to future grants through acquired rights laws? Is the company adhering to data privacy laws? 25

26 Decentralizing the Global Equity Program (cont d) Establish a Policy on Exchange Rate Risk With the dollar s slide among the major currencies, there is a need to consider exchange rate adjustments Any policy that includes exchange rate adjustments will require an annual review of currency levels If equity grant levels are developed at the local country level and expressed as a percentage of salary, then a company should be able to avoid exchange rate issues Approach will still require a company to benchmark global equity grant levels every two to three years Company may still want to establish a set exchange rate measurement period for communication purposes 26

27 Observations Although most companies have adopted a US centric grant approach, local benchmarking can be more effective and yield tremendous cost savings Implement an omnibus equity plan and select vehicles that support the company s overall and local businesses While it may be an administrative burden, it is important to consider the tax implications within each country Note that administrating multiple local programs may be costly Consider not implementing an equity grant program if only one or a few executives are expected to be covered in a country or region Have a consistent approach for dealing with exchange rate fluctuations Investigate pros/cons of charging cost of plan to local subsidiary 27

28 Observations (cont d) Consider implementing program only in key geographies Potential fairness issue as local nationals are increasingly expecting some degree of equity participation As companies shift toward performance plans, global plans should utilize easily defined/transferable metrics and simple terms Be aware of potential problems with survey data To determine a market benchmark rate you may need to use multiple sources with different methodologies Be Cautious 28

29 Thank You! 29