Equity in a global landscape Shane Smailes & Michelle Kassis pwc.com.au

Equity in a global landscapeShane Smailes & Michelle Kassis

pwc.com.au

PwC

1 The global landscape

2 Equity trends

Grants

Tax compliance and planning

Equity administration

What does this mean for you?

3 Going global?

Agenda

2

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The global landscape

13

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The global landscape

4

• 83% of CEOs expect to grow operations in South East Asia

• 59% of CEOs see emerging markets as more important than developed markets to their future

• More than half of CEOs are planning to move experienced employees from their home market to newer markets to circumvent skills shortages.

Source: 15th PwC Annual Global CEO Survey

Global growth

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The global landscape (cont’d)

5

• 53% of CEOs see lack of key skills as a major challenge

• One in four CEOs say lack of talent has meant cancelling or delaying a strategic initiative

• 78% of CEOs are demanding a change to strategies for managing talent (The number one priority for CEOs).

Source: 15th PwC Annual Global CEO Survey

Skills shortages

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6

• 71% of Millenials expect and want to do an overseas assignment during their career

• More than half of Millennials expect to have between two to five employers during their working lives (a quarter expecting to have more than six).

Source: Millennials at work – Reshaping the workplace

Millennials re-shaping workforce

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7

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Equity trends

8

2

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Equity trends

9

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Equity grant practices

10

2.1

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Equity grant practices

11

Key driver of equity compensation continues to be alignment of compensation strategy to business strategy.

However there was a notable shift in “addressing issues raised by the Board” which increased from 1% in 2009 to 9% in 2011.

There is a continuing decline in service based stock option awards. Performance based shares/units are now more popular than at any time in history. Restricted Stock and Restricted Stock Units are becoming the most common vehicle in virtually all industries and among companies based in every surveyed country.

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Equity grant practices (cont’d)

12

20092011

60%

50%

40%

30%

20%

10%

0%Align Comp with

Business StrategyTo address

issues raised by the Board of

Directors

Int'lCoordinat

ion

Changes made – Other

Corp Governance

Issues

Options Out ofMoney

Dilution/IssuesRaised by ISS

Tax Issues AccountingIssues

Drivers of changes in equity comp

Market Trends

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13

Type of equity offered

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Performance-based Market-based

2009

2011

9% 9%

9% 6%

2009

2011

5% 7%

3%

2009

2011

7% 7%

3% 6%

2009

2011

33% 26%

34% 27%

2009

2011

23% 16%

23% 20%

2009

2011

28% 17%

10% 15%

Ph

anto

mS

tock

SA

R

Sto

ckS

ettl

edS

AR

RS

UR

SO

pti

on

s

2%

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14

Most frequently cited performance/market targets

35%

30%

25%

20%

15%

10%

5%

0%EPS Shareholder

ReturnReturn Revenue/

GrowthOther Stk Price/TSR

Relative to Peers

Cash Flow EBITDA Stk/Share Price

EBIT

2011 2009 2007

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15

Vesting periods100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

3 years – cliff 3 years – graded 4 years – cliff 4 years – graded

Other

17% 15% 14% 15%

25%17% 16%

27%

9% 9%

11%

28%26%

8%

38%36%

34% 31%

12%12%

Options/SARs RS/RSU/Phantom Options/SARs RS/RSU/Phantom

Executives VPs/Mgr

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16

Reasons for shareholder dissatisfaction in equity plans70%

60%

50%

40%

30%

20%

10%

0%

Want MoreRestrictions in

Exec Comp

Want MoreControl Over

LTIs

Other Concernedabout Dilution

Want MoreLinks to CoPerformance

Plans TooGenerous

Want MoreControl Over

Risk

ConcernedAbout

Oversight

Want MorePredictability in Budgeting

Comp Expense2011 2009

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17

2.2

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18

Companies remain focused on achieving both local employee and company tax efficiency/savings and global compliance.

While the most challenging aspect of offering equity remains “compliance”, “communication” and “cross departmental coordination” also present significant challenges.

The most challenging tax compliance countries have proven to be China, the United Kingdom, the United States, France, India and Australia.

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Tax compliance and planning (cont’d)

19

Most challenging aspects of offering equity80%

70%

60%

50%

40%

30%

20%

10%

0%

Compliance Administration Global GrantGuidelines

Communications Cross-countryCoordination

Cross-departmentalCoordination

Other

2011 2009

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20

Companies audited in the last three years (as % of responses)40%

35%

30%

25%

20%

15%

10%

5%

0%

Germany UK France US Japan China Netherlands Singapore

2011 2009

Philippines South Africa South Korea Switzerland

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21

Countries with most challenging tax compliance

2009 2011

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

US

UK

Switzerland

Singapore

Russia

Philippines

Netherlands

Japan

Italy

Ireland

India

Hong Kong

Germany

France

China

Canada

Brazil

Belgium

Australia

Argentina

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22

Prevalence of internal compliance reviews

2011 2009 2007

60%

50%

40%

30%

20%

10%

0%

All (100%) Most (50% or more) Some (49% to 26%) A few (Less than 25%) None

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23

Frequency of internal compliance reviews70%

60%

50%

40%

30%

20%

10%

0%

Upon Implementation the plans

Annually Every 2 years OtherEvery 6 months or more frequently

2011 2009 2007

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Recharge of plan costs

• Main driver behind charging back equity costs to foreign affiliates is to secure corporate tax deductions. This showed a significant increase from 23% in 2009 to 44% in 2011.

• 80% of participants indicated they have a recharge agreement in place – a drop of 14% from 2009 figures.

24

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25

Reasons to start charging back equity plan costs

2011 2009

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%To secure local tax deductions Both of the above To mitigate costs associated with

expensingOther

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26

If you charge back, what/when is the subsidiary charged30%

25%

20%

15%

10%

5%

0%Grant date fair value Spread/value at time of

settlementSpread minus grant date

fair valueConsulting and advisory

costs

at grant from grant to vest at settlement

Filing and reporting fees

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27

2.3

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• While the most challenging aspect of offering equity is “compliance” interestingly the most significant jumps were in “communications” which increased from 31% in 2009 to 48% in 2011 and “cross country

co-ordination” which increased from 30% in 2009 to 46% of participant in 2011.

• 39% of participants in 2011 delivered their award agreements via the administrator’s internet site compared to 25% in 2009.

• A notable increase in employees acknowledging receipt at grant via an electronic system hosted by the Company was seen from 9% in 2009 to 48% in 2011 – a gain of 39%.

• 65% of participants use an external stock plan administrator to store their equity data which is consistent with 2009. There was a drop in storing equity data “in-house using database application”.

• 35% of participants said their stock plan administration software was not adequate to meet their tax needs. An increase of 13% from 22% in 2009 to 35% in 2011.

28

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Equity administration (cont’d)

29

80%

70%

60%

50%

40%

30%

20%

10%

0%

Financial Services – Bank

Third PartyRecordkeeper

Transfer Agent/Registrar

Financial Services –Discount Brokerage

OtherFinancial Services – Full Service Brokerage

2011 2009 2007

Current primary service provider

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Equity administration (cont’d)

30

Method of award agreement delivery45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Posted on theAdministrator’s

Internet Site

Sent by Email toEE's CompanyEmail Address

Mailed to EE'sHome Address

Mailed to EE'sWork Address

Other Posted on theCompany’s

Intranet Site

No AwardAgreementsDistributed

2011 2009 2007

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31

2.4

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32

• Between 2009 and 2011 there was a notable drop in companies offering service based stock options from 46% to 24%.

• Service based plans in Australia still remain the most prevalent when compared to performance and market based plans.

• In 2011, 67% of Australian companies offering a share purchase plan had participation levels of between 0% – 25% and 20% of companies had participation levels between 26% - 50%. When compared to 2009, 44% of companies had participation levels between 26% - 50% and 36% of companies had participation levels between 0% – 25%.

• The most common vesting condition in Australia remains continued employment of 3 – 4 years and is used by 45% of companies. Continued employment for 2 – 3 years comes in at 33%.

• 72% of companies surveyed had not considered the impact of payroll tax on equity plan awards in certain states.

Australia

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Going global?

33

3

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Going global?

Mob

ilit

y m

att

ers

Ow

ners

hipH

owW

hatW

hy

34

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Going global? (cont’d)

• Consider why you want to offer the plan internationally.

• What objective are you trying to achieve?

• What benefit do you want to provide?

Wh

y

35

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Reasons for offering equity internationally

36

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

To create a uniformglobal equity/stock compensation benefit

To offer our employeesthe opportunity to

become shareholders

To match offers made bynon-local competitors

To match offers made bydomestic competitors

Other

2011 2009 2007

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• Understanding the tax, regulatory and legal implications in the countries that you wish to offer equity is of paramount importance.

Going global? (cont’d)W

hat

37

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• How will you communicate the plan globally?

• Understand the limitations of your global systems – can your payroll handle equity awards in all locations?

• Can your share plan administrator deliver equity in the countries that you operate?

• Will you recharge plan costs/can you recharge costs?

Going global? (cont’d)H

ow

38

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• Implementing a plan globally works best where there is central ownership of the administration of the plan. Where will this ownership sit?

• Who will monitor tax, legal and regulatory filings and ensure they are undertaken in a timely manner?

Going global? (cont’d)O

wn

ers

hip

39

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• Where plans are implemented globally, it generally allows mobile employees to continue participating in the plan regardless of whether they move from one country to another.

• The movement of employees throughout the life of an award creates tax complexities as it can generate trailing tax liabilities long after an employee has left a location.

• Many of the tax obligations which arise are employer obligations – How will you track and deal with these liabilities?

Going global? (cont’d)M

ob

ilit

y m

att

ers

40

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Going global? (cont’d)

41

Methodology to track expatriates from grant to settlement

25%

20%

15%

10%

5%

0%

Excel Spreadsheet Mobility Department Other Stock PlanAdministration

("SPA") Software – "Snapshot"

Only

SPA Tracks HistoricMobility

Reconcile SPASoftware to

PayrollStubs

2011 2009

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Conclusion

42

4

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Presenters

43

Shane Smailes

PwC Partner

Melbourne

P: +61 3 8603 6097

Email: [email protected]

Michelle KassisPwC DirectorMelbourneP: +61 3 8603 5676Email: [email protected]

pwc.com.au

© 2012 P ricew aterhouseCoopers . A ll rights reserved.P wC refers to the A us tralian member firm, and may sometimes refer to the P w C netw ork .E ach member firm is a separate l egal entity . P lease see ww w .pwc .com/struc ture for further details .

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Equity in a global landscape Shane Smailes & Michelle Kassis pwc.com.au