NORTH AMERICA CHAPTER

Offering equity to employees is a key strategy for startups to attract talent over larger firms, seen in Europe where successful companies like Klarna and Deliveroo have spurred new ventures. However, European taxation on employee stock options varies significantly by country, with Estonia, Lithuania, and the UK cited as the most favorable due to lower tax burdens and simpler regulations compared to countries like France and Germany, which have more stringent tax policies and regulations. These differences impact how much employees can potentially gain from their stock options, influencing company decisions on offering ESOPs versus other equity schemes like VSOPs in heavily regulated markets.

The Asian Utilities Engagement Programme (AUEP), led by the Asian Investor Group on Climate Change (AIGCC), focuses on linking executive compensation to climate-related Key Performance Indicators (KPIs) in Asian utilities. The program urges these companies to implement governance frameworks for climate issues, establish decarbonization timelines, disclose climate information according to TCFD guidelines, address physical climate risks, and ensure their lobbying activities align with climate objectives. Several companies, such as Japan's J-Power and Chub Electric, as well as Malaysia's Tenaga Nasional, are already incorporating sustainability KPIs into their compensation structures, and the program plans to expand its engagement to regulators and other markets.

This article serves as an introductory guide to equity compensation plans, particularly addressing common inquiries from founders. It focuses on two essential aspects: types of equity compensation, such as stock options and restricted share units (RSUs), along with their distinctive features and potential tax implications. Additionally, the article emphasizes the significance of establishing a formal equity compensation plan, often referred to as a stock option pool or an equity compensation pool. The allocation of securities in this plan impacts the fully-diluted ownership percentages of existing shareholders and allows corporations to benefit from preferential tax treatment.

The U.S. IRS released a memorandum, offering guidance on how to source income from restricted stock units (RSUs) for U.S. Social Security (FICA) purposes when the vesting period spans multiple tax years. This guidance provides employers with some clarity on adapting income tax regulations to apply to FICA tax, reducing uncertainty and potential issues during IRS audits. While the memorandum is specific to RSUs granted to U.S. citizens and residents, its principles can be applied more broadly to other forms of multi-year compensation, nonresident aliens, and different types of employers.

This edition of On the board's agenda, in collaboration with Deloitte's Chief Executive Program, examines recent developments in executive compensation practices, addressing challenges related to market volatility and the impact of variations across countries on compensation strategies. With increasing complexity in compensation governance, it is crucial for boards to align pay with shareholder returns, performance goals, and stakeholder interests, while considering factors like DEI and ESG considerations. The discussion also emphasizes the need for boards to strike a balance between short-term and long-term concerns in crafting effective executive compensation strategies.

This article emphasizes the importance of developing a comprehensive compensation plan that goes beyond salary to attract and retain top talent. It provides guidance for small business owners and HR managers on designing a competitive compensation plan that includes elements such as benefits and equity-based programs, highlighting the benefits of a well-structured plan in supporting business strategy, recruitment, motivation, and market competitiveness. The article concludes with recommendations on creating an outline, appointing a manager, determining a philosophy, setting pay rates, establishing career advancement opportunities, finalizing policies, gaining leadership approval, implementing a communication plan, and monitoring the plan's effectiveness.