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Trends in the International ESPP Landscape
Philadelphia NASPP Chapter MeetingOctober 20, 2009
Table of contents
Section Page
I Overview of Employee Stock Purchase Plans (ESPP) 2
• Operation of ESPPs
• Reporting requirements
• ESPP alternatives
II Impact of falling stock prices on ESPPs 17
III Latest trends – Survey results from PwC’s Global Equity Incentives Survey
24
IV International considerations 29
V Questions & answers 46
VI Contact information 47
Section 1Overview of Employee Stock Purchase Plans (ESPP)
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Why offer ESPP PlansSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
Employer benefit• Retain, attract and motivate• Align all staff levels with shareholder interest and ownership
Employee benefit• Flexibility and choice
- Employees choose to opt in or out of plan- Convenience of payroll deduction - Buy stock at discount to market value- Immediately vested, can sell stock at any time
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Key features of ESPPsSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
• Opportunity to purchase company stock at a discount
• Average employer discounts of 15% (see below)
• Discount may not be taxable (in the US); Growth in value may be taxed as capital gain
• Purchases funded through payroll deductions
• Average purchase period is 6 to 12 months
• Look-back provision enables employees to purchase shares at minimum price (resets purchase price)
Amount of discount % of companies1
5% 7%
5%-15% 7%
15% 71%
More than 15% 7%
Other 7%
1From the PwC Global Equity Incentives Survey
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Key features of ESPPsSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
1From the PwC Global Equity Incentives Survey
2009 survey1 results show• Purchase period
- More than 20% of companies changed their purchase period to 6 to 12 months
- 50% of companies offer 6 month purchase period in 2009 compared to 24% in 2007
• Look-back provision- Companies maintained status quo - no look-back provision- 56% of companies have no look-back provision in 2009 compared to 57% in
2007
• Employer discount- 72% of companies offer a 15% discount in 2009 compared to 53% in 2007- Thus approximately 20% of companies increased their Plan discount to
15%
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Key features of ESPPsSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
2009 survey results show• Discontinuation of ESPP
- 12% of participants discontinued their Plans- 70% of companies in 2009 are not discontinuing their ESPP compared to
83% in 2007
- 8% participants replaced the ESPP with cash awards- 21% of companies eliminated the ESPP with no replacement in 2009
compared to 18% in 2009
• “Safe Harbor” eligibility- 27% of participants qualified for the “Safe Harbor” plan in 2009 such that
they did not have to accrue a compensation expense compared to 22% in 2007
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Survey results from PwC’s Global Equity Incentives SurveySection 1 – Overview of Employee Stock Purchase Plans (ESPP)
What features of ESPP have changed?
0%
10%
20%
30%
40%
50%
60%
70%
Look-back Discount Purchase period Other
2009 2007 2006
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Survey results from PwC’s Global Equity Incentives SurveySection 1 – Overview of Employee Stock Purchase Plans (ESPP)
What is the lookback for the ESPP?
0%
10%
20%
30%
40%
50%
60%
No look-back 3 months 6 months 12 months 24 months Other
2009 2007
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Survey results from PwC’s Global Equity Incentives SurveySection 1 – Overview of Employee Stock Purchase Plans (ESPP)
What is the discount for the ESPP?
0%
10%
20%
30%
40%
50%
60%
70%
80%
5% More than 5% and lessthan 15%
15% More than 15% Other
2009 2007
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Survey results from PwC’s Global Equity Incentives SurveySection 1 – Overview of Employee Stock Purchase Plans (ESPP)
Length of purchase period for ESPP
0%
10%
20%
30%
40%
50%
60%
Single day 1 month 3 months 6 months 12 months Other
2009 2007
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Survey results from PwC’s Global Equity Incentives SurveySection 1 – Overview of Employee Stock Purchase Plans (ESPP)
If discontinued ESPP, replaced with what?
2009 2007
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
We have not discontinued our ESPP
Eliminate - no replacement Replaced with cash Replaced with non-equity-basedbenefit (DC plan, etc.)
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Survey results from PwC’s Global Equity Incentives Survey
Does your ESPP qualify as a "Safe Harbor" plan under FAS 123R (no comp expense)?
14%
22%
27%
86%
78%
73%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2006
2007
2009
Section 1 – Overview of Employee Stock Purchase Plans (ESPP)
Yes No
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Ways to reduce employer compensation costSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
From NASPP Annual Conference 2007
Shorten offering period (e.g. from 24 months to 6 months)• The longer the offering period, the more diluted the Plan, since employees are
more likely to purchase their shares at a substantial discount
Eliminate look-back feature• Reduces administrative and cost burden
Reduce discount (e.g. from 15% to 5%)• The smaller the discount, the less the cost per share
ESPP cost per $10 share
15% discount 10% discount 5% discount
Look-back period No limit Limit No limit Limit No limit Limit
24 months $4.33 $3.94 $3.84 $3.58 $3.36 $3.23
18 months $3.95 $3.61 $3.46 $3.24 $2.98 $2.87
12 months $3.51 $3.23 $3.02 $2.83 $2.53 $2.43
6 months $2.92 $2.72 $2.43 $2.29 $1.93 $1.86
None $1.70 $1.50 $1.13 $1.00 $0.00 $0.00
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Changes to reporting requirementsSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
• New IRS reporting requirements proposed
• Form 3922 must be filed with the IRS by January 31 of the year following the year in which the transfer occurred
• Effective date 1/1/2010; Applies to any stock transfer on or after 1/1/2007
• Transitional relief available for 2007 and 2008 but information statements must still be provided to employees
• Employee information statement must include details of FMV of stock at purchase; discount; date of purchase etc.
• Separately, new ESPP regulations have been proposed that provide clarity on ESPP rules. For example, they intend to clarify when Plan amendments require shareholder approval
• In addition, the proposed regulations intend to align the ESPP with ISO rules on determination of maximum number of Plan shares
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ESPP alternativesSection 1 – Overview of Employee Stock Purchase Plans (ESPP)
There are three types of ESPP Plans:1
• Qualified Plans under Section § 423 IRC;
• Non-Qualified Purchase Plans; and
• Direct-Purchase Plans
Despite the comprehensive eligibility requirements and administrative burden nearly 70% of companies continue to operate Qualified ESPPs
1Prevalence data from The Ayco Company 2008
Feature Qualified plans Non-qualified plans Direct-purchase plans
% of companies 67% 13% 20%
Eligibility Comprehensive May be limited to higher paid employees
May be limited to higher paid employees
Holding period 5-Year maximum No maximum No maximum
Employee taxes No tax at purchase; capital gains at sale
Tax at purchase; capital gains at sale
Tax at purchase; capital gains at sale
Employer taxes No withholding obligations; no reporting obligations; no corporate income tax deduction
Withholding/reporting obligations; corporate income tax deduction
None
Discount Maximum discount of 15% Discount may exceed 15% No Discount
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ESPP alternatives
Employee Stock Ownership Plans (ESOP)• Employees receive cash balance upon retirement, resignation, or termination
of employment• Company allocates a certain number of shares annually and distributes shares
based on overall compensation• Usually mandatory• Tax-deferred until retirement
ESOP as part of a 401(K) plan• Used for retired employees (not current employees)• Company stock is part of overall asset mixture• Only for U.S. employees (not international)
- Private retirement plan• Indirect ownership of company stock
Section 1 – Overview of Employee Stock Purchase Plans (ESPP)
Section 2Impact of falling stock prices on ESPPs
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Impact of falling stock prices on ESPPsSection 2
When stock price falls, employees can purchase more shares
Example• Employee deferral percentage: 10% of pay• Employer discount: 15%• Employee share limit: 500 shares• Price at beginning of offering period: $50• Stock price decreases: $50 $10• Purchase price: 85% of $10 = $8.50 per share• Total employee discount: ($10 - $8.50)/$10 = 15.0%
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Impact of rising stock prices on ESPPs
In contrast, when stock price rises, employees unequivocally gain
Example• Employee deferral percentage: 10% of pay• Employer discount: 15%• Price at beginning of offering period: $50• Stock price increases: $50 $70• Purchase price: 85% of $50 = $42.50 per share• Total employee discount: ($70 - $42.50)/$70 = 39.2%
Section 2 – Impact of falling stock prices on ESPPs
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Impact of falling stock prices on ESPPsSection 2
As a consequence, companies may have to refund participant contributions
Example• Total contributions to purchase 500 shares (employee’s annual limit):
$8.50 x 500 = $4,250• With decreasing share price, contributions within 6 months result in the annual
IRS limit being exceeded: $4,250 x 6 months = $25,500
Result• Employee reaches IRS maximum of $25,000 within 6 months • Contributions above $4,250 must be returned to employee• Employers need to have appropriate refund procedures in place
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Impact of falling stock prices on ESPPsSection 2
Contributions higher than purchases • Funds available for share purchase must be returned
- Cash burden for company- PR damage to plan
• Ensure correct payroll processing of refunded contributions• Ensure appropriate employee communications
$25,000 IRS fixed annual limit (for Section 423 plans)• Higher number of shares available for purchase • The limit could help manage potential share depletion
Sufficient plan shares available? • If not, shareholder approval needs to be in place• Cancellation of “underwater” shares without shareholder renewal• Automatic cancellation in some cases
- Creates inactive plan for 2009 and beyond
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Impact of falling stock prices on ESPPsSection 2
Employee reaction• Perceived “value” of Plan may decrease given falling stock prices• Employees may sell immediately to avoid risk of future stock price decline and
company instability• This would result in an increase in “disqualifying dispositions”• PR damage - will ESPPs continue to be associated with higher productivity,
return on assets, and profitability for employees?• In the US, ESPPs formed part of the equity mix in 30% of companies in 2009
compared to 38% in 2007: a decline of 8% over 2 years
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What can your company do?Section 2 – Impact of falling stock prices on ESPPs
• Communication and administration
- Develop communication strategy & materials
- Keep employees informed of changes
- Encourage employees to participate in the plan
• Review current plan design
- Consider providing maximum share limits per employee
• Limit number of shares a single participant may purchase or shares all participants may purchase
• This will help manage refunds and potential share depletion
- Consider plan suspension rather than cancellation
• If allocated shares are depleted, suspend plan for year rather than cancelling it
• Tailor approach to your company
Section 3Latest trends in ESPPs
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Trends in ESPPsSection 3 – Latest trends in ESPPs
Prevalence• ESPPs became popular in the 1980s/1990s for Bay Area firms (e.g. IBM,
Microsoft & Google and remain prevalent in high tech companies)- However, our survey results suggest the key driver in 2009 for equity
compensation practices is the alignment of compensation with business strategy followed by addressing market trends
- ESPPs formed part of the equity mix in 30% of companies in 2009 compared to 38% in 2007: a decline of 8% over two years
• Stability of ESPPs- In 2006 more than 50% of participants planned to discontinue their ESPP.
However, in 2007, ESPP usage stabilized at around 40%. In 2009 this dropped to 30%1
- Overall US ESPP participation levels saw a 25% increase in 2009 in the 25% to 50% bracket
- FAS123(R) did not substantially change ESPP prevalence1From the PwC Global Equity Incentives Survey
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Survey results from PwC’s Global Equity Incentives SurveySection 3 – Latest trends in ESPPs
Equity comp mix - Companies with employees in the US
0%
10%
20%
30%
40%
50%
60%
70%
Options: Service
Options: Perf/Mkt
RS & RSU: Service
RS & RSU: Perf/Mkt
SAR: Service
SAR: Perf/Mkt
Phantom Stock
ESPP
2009 All Companies 2007 All Companies 2006 All Companies
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Survey results from PwC’s Global Equity Incentives SurveySection 3 – Latest trends in ESPPs
Driver of equity comp practices
0%
10%
20%
30%
40%
50%
60%
70%
80%
Align Comp w/Bus. strategy
Addressmarket trends
Changesmade - Other
Addressshareholderissues
Internationalcomp strategy
Address CorpGov/BoDissues
Address tax issues
Out of themoney options
Address Acc'gissues
2009 Grants 2008 Grants 2007 All Companies 2006 All Companies
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Survey results from PwC’s Global Equity Incentives SurveySection 3 – Latest trends in ESPPs
ESPP participation levels - US
0%
10%
20%
30%
40%
50%
60%
0-25% 25-50% 50-75% 75-100%
2009 2007
Section 4International considerations
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International considerationsSection 4
Prevalence• Top five countries showing reduction in prevalence are Taiwan, Germany,
France, notably the U.S., and Hong Kong• Top five countries showing increase in prevalence are Uzbekistan,
Kazakhstan, Kuwait, Saudi Arabia and Russia• Participation levels have increased in Germany even though prevalence
has dropped• Significant increase in participation levels in Argentina and Russia
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Survey results from PwC’s Global Equity Incentives SurveySection 4 – International considerations
Countries with decreasing ESPP prevalence 2009 compared to 2007
0%
5%
10%
15%
20%
25%
30%
Tai
wan
Ger
man
y
Fra
nce
Uni
ted
Sta
tes
Hon
g K
ong
Sw
eden
Mal
aysi
a
Spa
in
Tha
iland
Net
herla
nds
Italy
Phi
lippi
nes
Den
mar
k
Uni
ted
Kin
gdom
Bel
gium
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Survey results from PwC’s Global Equity Incentives Survey
Countries with increasing ESPP prevalence 2009 compared to 2007
Section 4 – International considerations
0%
5%
10%
15%
20%
25%
30%
Uzb
ekis
tan
Kaz
akhs
tan
Kuw
ait
Sau
di A
rabi
a
Rus
sia
Arg
entin
a
Oth
er
Chi
na
Bra
zil
Irel
and
Aus
tral
ia
Indi
a
Mex
ico
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Survey results from PwC’s Global Equity Incentives Survey
ESPP participation levels - Germany
Section 4 – International considerations
0-25% 25-50% 50-75% 75-100%0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2009 2007
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Survey results from PwC’s Global Equity Incentives Survey
ESPP participation levels - Argentina
Section 4 – International considerations
0%
10%
20%
30%
40%
50%
60%
0-25% 25-50% 50-75% 75-100%
2009 2007
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Survey results from PwC’s Global Equity Incentives Survey
ESPP participation levels - Russia
Section 4 – International considerations
0%
10%
20%
30%
40%
50%
60%
70%
80%
0-25% 25-50% 50-75% 75-100%
2009 2007
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International considerations Section 4
• ESPPs are commonly extended to employees of foreign entities
• However, in most cases, the ESPP is not considered tax-qualified locally
• ESPP alternatives are available under country-specific, tax-favoured regimes (e.g. Save As You Earn in the U.K.)
• Difficulty lies in maintaining the essence of the ESPP design
• Typical issues faced include:
- Foreign laws prohibit exclusion of part-time employees (e.g. EU)
- Employee contributions earn interest
- Statutory reporting compliance for local payroll deductions and employment law considerations
- Foreign exchange limitations (e.g. China)
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International considerations Section 4
• Small tax exemptions/concessions are available in:
- Austria (discount exempt up to Euro 1,460 if shares held for more than five yrs)
- Germany (discount exempt up to Euro 360)
- Italy (discount exempt up to Euro 2,065.83 if shares held for at least three yrs)
- Norway (discount exempt up to Nok 1,500)
- Spain (discount exempt up to Euro 2,000. (Euro 3,005 for social taxes) if shares held for more than three yrs)
- U.K. (employees' contribution under SIP exempt up to GBP 1500)
• Tax approved alternatives are available in the U.K. and France and a tax efficient structure can be implemented in Switzerland
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International considerations Section 4
United Kingdom• Share Incentive Plan (SIP)
- Can be used without modification to ESPP - Employees purchase stock at pre-tax wages limited to £1,500 p.a.- Employees must hold shares for five years for maximum tax benefit- Employee only pays capital gains tax on growth in value after year five.
Prior growth tax free.
- No social taxes if required holding periods met
• Matching shares under SIP- Used to mimic discount in ESPPs- E.g., instead of a 15% discount on share price, company can offer $15 in
matching shares when the employee purchases $85 worth of company shares
- However SAYE is more common in the U.K.
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International considerations Section 4
United Kingdom• Save As You Earn (SAYE)
- Can be used without modification to ESPP - Employees receive options to acquire shares after three, five or seven years- Employee contributions are used to fund exercise price and earn interest- Contributions made from after tax wages and limited to £3,000 p.a.- Employees must hold shares for three years for maximum tax benefit- Employee only pays capital gains tax on growth in value. Prior growth
tax free.• Discount of up to 20% possible under SAYE
- Used to mimic discount in ESPPs- SAYE is more common for UK companies.
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International considerations Section 4
For UK companies only from the Proshares 2008 SAYE Survey
SAYE and SIP
568
92
0
100
200
300
400
500
600
Number of companies with SAYE only Number of companies with SIP & SAYE
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International considerations Section 4
1From the Proshares 2008 SAYE Survey
United Kingdom1
• Trends: SAYE Plans- Prevalence of three-year accounts- 76% of companies offer the maximum 20% discount- Increasing number of companies have underwater options- Stability in frequency of plans; 43 new plans in 2008
SAYE plans/approval43
21
9
05
101520253035404550
Number of companies whointroduced new SAYE plans in 2008
Number of companies who did notrenew their SAYE approval in 2008
Number of companies who didrenew their SAYE approval in 2008
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International considerations Section 4
France• Plan d’Epargne d’Enterprice (PEE)
- Like a 401(K) plan- Employees purchase stock with after tax wages- Employees must hold shares for five years
• French-qualified stock option plan- Convert existing ESPP into a qualified option plan- Need to establish a French sub-plan- Maximum discount: 20% of average stock price over 20 days prior to grant- Certain tax consequences for discounts greater than 5%
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International considerations Section 4
Actual Benefit at purchase Taxable benefit at purchase
FMV of share at purchase 100 Tax value of share at purchase (per table)
84
Less: purchase price <80> Less: purchase price 80
Actual benefit 20 Taxable benefit 4
Switzerland• No qualified or ESPP type plans but can mimic discount• Restriction on sale reduces FMV for tax purposes• Taxable benefit at purchase calculated with prescribed valuation tables
Example• FMV at purchase: 100• Discount: 20• Restriction on Sale: Three years from purchase
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International considerations Section 4
Switzerland• Typically see a wider range of purchase prices: 60%-90% FMV• Often implemented for broad base of employees• Particularly beneficial tax treatment because private capital gains are
generally tax-free in Switzerland• Thus only taxable element is the benefit at purchase i.e., the discount• ESPPs generally possible for non-quoted companies, but valuation is crucial
and should be agreed with the tax authorities in advance• Employees may only benefit from tax-free private capital gains if the valuation
represents fair market value (for tax purposes), and there is no change in the valuation mechanism
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International considerations Section 4
European region• “Dexia Model” Used by Dexia Bank in Europe
- Employee loans money externally to purchase shares with 20% discount- Employee repays loan in fixed share amount rather than cash- If share price is insufficient to repay loan: employee regains the amount
they invested- If share price is sufficient to repay loan: employee receives added value
after loan is repaid
- Result: Outside lender hedges to cover risk of share price decline- 80% participation rate in Europe- Possible extension to U.S.
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International considerations Section 4
China and Hong Kong • ESPPs increasing in China although companies face strict compliance
regulations• No firms operating solely in Hong Kong offer ESPPs• Companies offering ESPPs must take the following steps:
- File foreign exchange quota and application for opening special account with State Administration of Foreign Exchange (SAFE)
- Use the registered special account for all fund transfers
• Stringent Fines: Violations result in fine of 30% to five times the value of foreign exchange evaded
• 14% of companies with employees in China offer an ESPP in 2009, compared to 7% in 2007 and 10% in 2006
• In addition there are low participation rates1 • Most companies have participation rates of between 0%-25%
1From the PwC Global Equity Incentives Survey
Section 5Questions & answers
Section 6Contact information
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Contact information
PricewaterhouseCoopers LLP
Amy Lynn Flood (267) 330 – 6274
amy.lynn.flood@us.pwc.com
Geoff Hammel (267) 330 – 6331
geoffrey.m.hammel@us.pwc.com
Section 6
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