23 Jan Rolling out global share plans
Words:Barbara Seta, hkp/// group
What do companies need to know when rolling out a global share plan? Barbara Seta, Senior Partner at hkp/// group in Zurich, discusses customisation, communication and unnecessary complexity.
When companies decide to roll out a new share plan or make changes to an existing plan, two factors should be considered: the objectives of the plan and the practicalities of implementation.
Organisations should carefully consider what they want to achieve. For example, if retention is an objective, organisations need to consider the plan’s forfeiture rules. If the plan is voluntary, it needs to be sufficiently attractive. And how will the plan be implemented? Companies need to assess practicalities, including what data they have and need, the countries in which the plan will be operated, the number of eligible employees in each country, the existing operational set-up, and the approximate award volume. These factors will have an impact on the relative difficulty or ease of implementation and communication.
Compensation plans must align with the company’s existing or future strategy and fit into the compensation mix alongside the other benefits offered. This may vary from country to country or division to division, but organisations need to have an idea of how they want to position the plan and what individual participants will receive. This will determine what the plan will look like and whether it will be a success.
The end is just as important as the beginning
Sometimes companies only prepare for a new plan up to and including its rollout, but they need to consider the entire lifecycle of the plan from design and drafting and first awards being granted to the time when final payments are made. In the years between a plan’s start and end points, there could be any number of corporate transactions and external and internal changes that could impact the employees or the shares they hold, from changes to the share capital, such as stock splits or rights offerings, to changes such as part of the business being sold or merged with other parts.
The plan rules need to contain some flexibility to accommodate such situations while also being sufficiently clear to avoid potentially adverse outcomes for the company, its employees or shareholders. Take an extreme case – if a company delists from the stock exchange (which happens rarely but can happen), suddenly there is no market for the shares, so organisations need to be able to offer something else in return. This needs to be formulated in the plan rules in such a way that it does not adversely affect the accounting treatment of the plan. A more common situation is that management may simply want to make changes to the terms of the plan in later years. So it needs to be clear what the approval process is. Therefore, it is important to think through all the possibilities and make the plan future proof.
Keep it simple
Along with the design, operational processes also need to be clearly defined from the beginning, including the cooperation between departments, which need to work effectively together to make the plan a success. This is particularly true of HR and Finance departments since typically HR is in charge of the plan but any changes will also impact Finance. A global HR system, choice of a suitable administrator and efficient payrolls can make a big difference on how complicated or easy it is to implement the plan.
It is very difficult at the beginning for companies to get a clear picture of the total cost and they may not realise that the cost is very much the result of the decisions taken on plan design, communication and implementation. Yet, it is relatively easy to manage the expense by making the right decisions.
My advice to companies is to avoid unnecessary complexity as much as possible. The more complex something is, the more expensive it will be. A complex plan will increase the cost not only of implementation but also of the operation of the plan for years to come. Plans have a tendency to become more varied over time and if this can be managed in a controlled way from the beginning, it saves a lot of headaches later on.
Many companies with mature plans are now struggling with how many plan variations they have accumulated over the years and are trying to streamline them, which in turn can be expensive
Customise, customise, customise
In some cases, companies select a plan and rollout approach based on what they see other companies doing, instead of customising it to meet their own needs. While a lot can be learned from the experience of other companies and advisers, the best approach to implementation is not something which should be taken off the shelf, as every company is unique in terms of its history, culture, structure and employees. What is important is that the plan becomes part of the fabric of the company, which is why we would advise companies to customise their approach to design, implementation and communication.
The other question is how much companies wish to customise their plans for individual countries or groups of employees. Like with all such decisions, there are pros and cons to doing this – let’s take country-specific variations as an example: if a company customises a plan in a country to make it more tax efficient, this may be in line with local market practice and save tax or social security, but it can also make the plan more expensive to operate. Many companies with mature plans are now struggling with how many plan variations they have accumulated over the years and are trying to streamline them, which in turn can be expensive.
There are variations that companies may be forced to make either for business reasons or to ensure compliance. For example, it is not possible to do normal payroll deductions in Hong Kong and some countries, such as Italy, prescribe a specific definition of market value, which must be used to calculate the taxable benefit. In the financial services industry in particular, there are very detailed rules on how compensation needs to be structured, which also need to be taken into account. In such cases the company has to make certain amendments. But generally, it is often possible to avoid or minimise variations to those that really benefit the company and avoid unnecessary complexity. Again, it is important to find the right balance.
Country to country
The implementation effort required also depends on the type and number of countries in which the plan is implemented. Some countries are more complicated from a legal or tax point of view: examples include China and – depending on the number of employees, type of plan and the company’s existing securities filings – the US.
However, it should not be assumed that more countries necessarily means more complexities or proportionally higher costs. Companies often believe that there is a price per country, but this is not the case: one can put a plan in place in a large number of countries at a reasonable cost or in a small number of countries and spend millions on it. It depends on the decisions made regarding plan design and rollout approach, including how to work with internal and external parties.
Some advisers have their own perceptions of what the prevailing equity culture is in other countries. For a long time it was, for example, assumed that China did not have an equity culture, but there actually is a very developed equity culture in the PRC now – it is just from a very different point of view. So if a company has employees in countries that are culturally different from each other, it is even more important that the plan design is simple enough so it can be easily explained to a large and diverse population in different cultures.
The last word
Less complexity makes it easier to communicate the plan and companies should think of external and internal communication in tandem. How will you present the plan to different audiences? In the past, companies would only think about communication geared towards their employees and external disclosure, but with digitalisation, social networks and employer ranking websites, it is vital to consider how internal and external communication overlap.
The internal and external communication approach will obviously differ depending on the plan. Plans for senior executives are mostly on-top or even, in case of certain deferral plans, mandatory. The challenge here is to help participants see the value of the plan while also ensuring that it is explained properly to external audiences, including shareholders.
In the case of voluntary plans, employee buy-in is required to make them a success. This may mean that it can be beneficial to involve employees in the development of communication content or delivery more directly. Employees are also much more willing to invest in shares if they have a positive view of the future and if they believe that the company will grow. Some companies are using this and the positive effect on engagement very effectively to present themselves as an attractive employer.
About the author
Barbara Seta is a Senior Partner at hkp/// group in Zurich and has more than twenty years of experience in the share plan industry. Working in London, Munich and Frankfurt, she advised companies in a variety of industries on the design and global rollout of plans. She was also responsible for the group compensation framework of a global bank with ca. CHF 1 billion of awards granted annually under a variety of compensation and equity plans. Since 2014, Barbara has worked as a consultant again, advising companies on executive compensation, equity plans, performance management and other HR topics.