EUROPEANCHAPTER

Enhancing your global equity compensation strategy requires a deep dive into how participants across the world perceive and engage with these programs.

During a webinar held on 19 September 2024, Emily Cervino and Sarah Francis from Fidelity explored global perspectives, delving into their research that unveiled unique characteristics of equity compensation participants from Canada, China, Germany, India, the UK, and the US.

The session also shed light on how factors such as age and gender influence perceptions, offering invaluable insights into satisfaction, confidence, and educational needs.

In today’s competitive landscape, understanding these nuances is crucial for tailoring strategies that resonate globally, ensuring your equity compensation plans are both effective and impactful.

The rising importance of equity compensation

Equity compensation is a cornerstone of employee satisfaction and retention worldwide. Research indicates that 6 out of 10 companies are expanding eligibility for equity awards, with more than half increasing the value of these awards. As companies expand globally, the need to tailor these plans to meet regional differences becomes increasingly important.

Multinational organizations, some operating across more than 50 countries, must adjust for varying local requirements and cultural contexts to ensure their equity plans succeed.

Regional perceptions and behaviors

The webinar underscored how employees in different countries engage with equity compensation in distinct ways:

• Canada: Canadian participants are highly engaged, with 50% having sought professional financial advice, leading to higher confidence. About 68% plan to use stock plan assets for long-term goals like retirement.
• China and India: In these emerging markets, many participants are first-time stock owners, emphasizing the need for education on financial literacy and the long-term benefits of stock ownership.
• Germany: German participants have strong financial literacy but lower confidence in decision-making due to concerns over stock price volatility, underscoring the need for more structured educational resources.
• UK: Nearly half of UK participants are first-time stock owners with lower confidence, though satisfaction with Employee Stock Purchase Plans (ESPPs) is high due to payroll deductions and discounts. More education could address the knowledge gap.
• United States: In the US, a gap exists between intentions and actions—many plan to use equity compensation for retirement, but few follow through. Clear communication about the long-term benefits can help close this gap.
• India: Indian employees are highly engaged, often seeing equity programs as a primary source of retirement savings. Despite regulatory challenges, participation remains strong, reflecting broad enthusiasm for equity plans.

Actionable insights for a global strategy

Global equity compensation strategies cannot follow a one-size-fits-all approach. To ensure success, companies must adapt their programs to suit the specific needs of different regions. Key recommendations from the webinar include:

• Localized education: Offering region-specific resources and financial literacy tools empowers employees to make more informed decisions, especially in regions where professional advice is less accessible.
• Cultural relevance: Aligning equity strategies with local cultural values ensures better engagement. While long-term financial planning might resonate with Canadian employees, other regions may have more immediate financial concerns.
• Ongoing assessment: Continuously evaluating the performance of equity plans by region helps identify areas for improvement and adaptation, ensuring that the plans meet the evolving needs of the workforce.

In conclusion, tailoring equity compensation strategies to the specific needs of different regions is essential for boosting employee engagement and satisfaction. By providing localized education, understanding cultural differences, and regularly assessing plan effectiveness, companies can create compelling global equity programs that truly resonate with their diverse workforces.

This article is sponsored by Fidelity, a leader in helping organizations maximize the value of their global equity compensation strategies.

Contact Emily or Sarah directly for more information.

View a recording of the webinar on GEOlearn HERE.

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GEO and Fidelity are not affiliated.
Fidelity data as of March 2023.

Section 409A of the Internal Revenue Code governs the taxation of stock options and other deferred compensation, requiring companies to follow strict compliance standards to avoid severe tax consequences. This regulation was introduced in response to corporate scandals like Enron, aiming to enhance transparency and fairness in deferred compensation practices. For startups, compliance with Section 409A involves obtaining a 409A valuation to determine the fair market value of their stock, ensuring that employee stock options are priced appropriately and avoiding potential tax penalties and legal issues.

Following the SEC's T+1 stock settlement compliance date of May 28, 2024, companies are under pressure to ensure timely share issuance within 24 hours of vesting or option exercises. Failure to manage this process effectively could result in errors, fines, and dissatisfaction among employees.

In a webcast sponsored by Moss Adams, the importance of efficient data transfer between equity programs and payroll systems to support this regulatory mandate was discussed in detail.

Challenges in reconciliation controls

Tim Oakes, a seasoned partner at Moss Adams with over 25 years of industry experience, underscored the critical role of robust reconciliation controls in equity processing. Without adequate controls, errors could slip through the cracks, leading to severe consequences. 

Jesus Renteria, an equity compensation professional, highlighted that inaccuracies in data transfer between systems could result in erroneous tax reporting. Such errors not only incurred tax-related fines but also tarnished the employee experience, necessitating corrective actions such as adjusting tax amounts.

Benefits of reconciliation processes and reporting

A dependable reconciliation process ensures that records remain complete and accurate, even when dealing with multiple payroll systems and file formats. 

By preventing errors such as incorrect tax calculations, robust reconciliation processes playa vital role in maintaining compliance. 
For instance, the IRS mandated that companies deposit taxes exceeding $100,000 within a business day, failure of which could result in penalties. Timely reconciliation of payroll and equity data thus helps companies avoid such fines and stay compliant.

Pros and cons of common reconciliation tools and approaches
Various tools and approaches exist for equity payroll reconciliation, each with its own set of advantages and disadvantages.

• Spreadsheets - widely used for their flexibility and ease of use, but prone to human error and inefficiency with large datasets.
• Automation scripts - effective in automating repetitive tasks and reducing errors, but requires programming expertise for creation and maintenance.
• Custom applications – tailored solutions that offered high accuracy and efficiency, albeit with higher upfront costs and longer implementation times.

Jesus illustrated the effectiveness of automation scripts in streamlining the reconciliation process, especially in complying with the T+1 settlement rule. However, he also noted that the suitability of scripts depends on the specific needs and capabilities of each company.

The importance of accurate and timely tax deposits

Failing to make timely and accurate tax deposits could lead to significant penalties. For instance, if a tax deposit was late by 1 to 5 days, the penalty could be as high as 2% of the unpaid amount. The T+1 requirement further complicates deposit processes, underscoring the critical need for adherence to deadlines.

Equity record keeping and payroll reconciliation

A thorough understanding of the interaction between various systems is indispensable. The equity record-keeping system, managed either by a broker or an internal service, serves as a linchpin, connecting with HR systems, brokers, tax services, and other stakeholders. 

Reconciliation between these systems, particularly between equity records and US payroll, involves ensuring consistency across various fields such as year-to-date compensation and tax withholdings.

Challenges and solutions in payroll reconciliation

Reconciling payroll data can be intricate, particularly when considering factors like unemployment and disability insurance, local taxes, and international mobility taxation. 

To address these challenges, companies may adopt various reconciliation approaches:

• Spreadsheets - despite their widespread use, they are prone to errors and may not be suitable for complex or large-scale reconciliations.
• Scripting tools - offer automation and handle larger data volumes effectively, reducing manual effort and ensuring consistency.
• Purpose-built applications - provide robust solutions tailored to specific needs, though they entail higher initial costs and complexity.

Introducing a purpose-built payroll reconciliation solution

Moss Adams' purpose-built payroll reconciliation solution allows for flexible data ingestion and customization of business rules, promoting accurate and efficient reconciliation. 

The system supports automatic file imports and user permissions, with detailed error reporting and automation features to streamline the reconciliation process.

In conclusion, accurate tax deposits and reconciliation processes are indispensable for compliance and employee satisfaction. 
Whether through spreadsheets, scripts, or purpose-built applications, companies can navigate equity payroll reconciliation confidently, leveraging Moss Adams' knowledge in the field.

Contact Tim or Jesus directly for more information and to arrange a demo of their custom application for equity payroll reconciliation.