In a competitive labour market, companies must use the best resources available to attract and retain talented individuals. One option is to offer equity incentives, which give employees a direct stake in the financial success of the company. This incentivises them to work to the best of their ability, and better aligns staff with the company’s long-term objectives.
Increasingly, businesses are expanding their pool of available talent by building an international remote workforce, with team members scattered across the world. Equity incentives can help with recruitment by making the company stand out from other potential employers. And for smaller businesses, equity incentives allow them to compete with multinationals who may offer larger base salaries and bonuses.
But while equity incentives are a useful tool, offering them to a cross-border workforce is not straightforward. Here are three common mistakes companies can make:
- Assuming that there’s a one size fits all approach
When designing an employee stock ownership plan (ESOP), employers have a range of choices and can in fact set up different schemes for different countries. These can include special tax advantaged schemes like ISOs in the US (Incentive Stock Options) or the EMI (Enterprise Management Incentive) scheme in the UK. Other types of equity incentives include NSOs (Non-Qualified Stock Options), RSUs (Restricted Stock Units), Restricted Shares, Growth Shares, and VSOs (Virtual Stock Options), also known as ‘phantom shares’.
When it comes to the strike price, many companies choose to use the same price for everyone regardless of location, which is often determined by an external valuation. Companies should bear in mind that offering options to staff in the United States below the market value can trigger severe tax consequences but it’s also worth checking the rules in other jurisdictions when it comes to both a) the strike price and b) the valuation that should be used when there’s a taxable event, as the rules can vary. It is also worth mentioning that if you work with an employer of record, this may limit your ability to offer tax advantaged schemes in those countries. Remote will always be upfront with its clients about these issues and suggest possible solutions.
- Failing to consider the tax and registration implications
The possible tax aspects of equity incentives can vary widely in different countries. Some are simpler, some far more complicated, and each region will have its own tax compliance rules and procedures, with varying deadlines and due dates for corporate and individual filings.
One of the most important things to figure out is whether any tax owed on the options has to be withheld by the company or paid individually by the option holders. This is a highly nuanced area, and can be further complicated if your employees are moving between different countries and may have tax obligations in more than one place. If you are responsible for withholding, failing to conduct the withholding and reporting of these tax liabilities at the right time presents a risk for the company. However, you also want to equip your employees with the right information so they don’t land themselves in trouble.
The timing of when taxable events occur is also crucial. Usually for share options, it is at the point of exercise (the point where an employee purchases their shares at a set price), but in certain regions, tax can be triggered on grant of options or as they vest and its applicable taxation will vary widely from country to country.
Similarly, understanding the tax obligations for equity incentives in multiple countries can be challenging, and the tax reporting obligations in those regions can be even more difficult. Employers must become aware of any specific tax reporting obligations that are applicable to themselves and understand how these can be met as a foreign company.
Whichever ESOP a company ultimately chooses, it is important to clarify in advance what tax reporting obligations it will be subject to, as well as what taxes it (and its employees) will need to pay.
- Don’t forget the legal aspects!
As well as tax, different legal drafting and wider legal issues must be considered when designing any equity incentive package.
It’s important to work with a law firm when drafting your “home country” scheme rules and grant documentation. You may not need significant legal redrafting when granting options to folks in other countries, but it’s worth checking.
If you are issuing shares to employees following the exercise of options, you should think about the corporate law aspects of this, for example where you have the authority from your board or shareholders to issue these shares and whether you need to issue share certificates or register the shares.
If you are including performance based vesting instead of time based vesting, it’s important to consider the employment aspects of this to ensure you won’t be running into problems or disagreements.
Another area that has come under scrutiny is where directors have the discretion to decide who is allowed to keep their options when leaving the company; there are various cases that point to the need for such discretion to be used fairly rather than arbitrarily.
Businesses must also consider any accountancy rules. For instance, VSOs are often treated as “deferred salary arrangements”, but this creates a liability on a company’s balance sheet. A company with a global VSO plan that achieves significant growth may end up with an accounting issue and a high level of deferred compensation on its books, which will be viewed negatively by investors.
These warnings are not meant to discourage businesses from offering equity incentives. But with so many different rules and regulations to follow, it is essential that companies do not get complacent or assume that one country’s laws are like another’s.