Recent Trends and Issues in ESPPs

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)

PricewaterhouseCoopers 4

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


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




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%



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


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



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



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



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



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.)


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


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


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


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


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


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%


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



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



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



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


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


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


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



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



ESPP participation levels - US

0%

10%

20%

30%

40%

50%

60%

0-25% 25-50% 50-75% 75-100%

2009 2007

Section 4International considerations


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


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



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



ESPP participation levels - Germany


0-25% 25-50% 50-75% 75-100%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2009 2007



ESPP participation levels - Argentina


0%

10%

20%

30%

40%

50%

60%

0-25% 25-50% 50-75% 75-100%

2009 2007



ESPP participation levels - Russia


0%

10%

20%

30%

40%

50%

60%

70%

80%

0-25% 25-50% 50-75% 75-100%

2009 2007


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)



• 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



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.



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.



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



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



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%



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



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



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.



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%


Section 5Questions & answers

Section 6Contact information


Contact information

PricewaterhouseCoopers LLP

Amy Lynn Flood (267) 330 – 6274

[email protected]

Geoff Hammel (267) 330 – 6331

[email protected]

Section 6

© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

This document was not intended written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state local tax penalties.

Date post:	07-Nov-2014
Category:	Business
Upload:	geoff-hammel
View:	3,105 times
Download:	1 times

Recent Trends and Issues in ESPPs

Business