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INTELLIGENCE REPORT
Employee share plan trends
MARCH 2018
CERTAINTY INGENUITY ADVANTAGE
INTELLIGENCE REPORT » Insights from Annual General Meetings held in 2017
The data contained in this report is based solely on Computershare’s client meetings
INTELLIGENCE REPORT » Employee share plan trends 1
INTELLIGENCE REPORT » Employee share plan trends2
Executive Summary
2Executive summary
Introduction goes here
INTELLIGENCE REPORT » Employee share plan trends 3
Executive Summary
Welcome to the fourth edition of Computershare’s
Employee Share Plan Trends report, designed to
provide you with insights into the local and global
employee equity landscape.
Over the last 12 months, there has been little or no
variation for employee share plan activity across
Australia and New Zealand.
text
Name
Managing Director, CPM
INTELLIGENCE REPORT » Employee share plan trends4
4Data insights
INTELLIGENCE REPORT » Employee share plan trends 5
Data Insights
DATA INSIGHTS
Trends in take-up for different employee share plan types
Over the last 12 months there has been little movement
in participation across the different types of employee
share plans.
Our data, shows there is a decrease in participation for share
plans that offer a matching component and a corresponding
increase that don’t offer a matching component. This
anomaly can be attributed to one of our key clients offering
a salary sacrifice plan with matching in 2016 (83% take-up in
2016) but removed the matching in 2017, still achieving a take-
up of 62% which resulted in an increase in the salary-sacrifice
no matching. On balance, take-up remains steady.
Figure 1:
This example continues to support the theory that where
organisations offer a matching plan, take up is much stronger
than not offering matching (London School of Economics
2014 survey)
Plan participant voting trends
Companies who use Computershare to administer their
employee equity plans have the unique opportunity to capture
insights into their employee’s voting intentions. This can help
companies to structure their internal communications and
voting channels to enhance meeting activity.
Our research indicates that there is a continued decline in
voting trends for plan participants dropping to 1.00% in 2017
from 2.1% in 2016. The trend over the last 3 years indicates
a growing decline, and potentially less engagement for plan
participants. This trend is consistent for retail investors, with
both attendance and voting at meetings continuing to decline
in 2017 which is consistently attributed to general shareholder
disengagement and apathy with the current AGM format.. For
further information regarding general AGM trends, please
visit….
With regards to issued capital voted, our research shows that
6.5% of issued capital held in employee trust plans received
voting instructions from plan participants, up slightly from
2016.
Figure 2: Percentage of issued capital voted comparison — Employee Plan Participants (EPP) vs all meetings
Figure 3: Percentage of shareholders who voted
comparison — EPP vs all meetings
2015 2016 2017
EPP All
54.1%
44.0%
6.5%6.1%7.1%
48.1%
Salary Sacrificewith matching
Salary Sacrificeno matching
Broadbasedexempt gift
GlobalContribution
(post-tax)FY17FY16FY15FY14FY13FY12
0%
20%
40%
60%
80%
100%
2015 2016 2017
EPP All
4.7%4.4%
1.0%
2.1%
3.2%
4.6%
Data Insights
INTELLIGENCE REPORT » Employee share plan trends6
Computershare research proves benefits and shapes effective employee contribution plan design.
Can you empirically demonstrate your contribution plans
Return on Investment (ROI)?
Do you know your employees or the broader populations
preferred communications or enrolment method? With this
knowledge do you think crafting communications to suit
those methods could increase engagement?
The equity remuneration community traditionally has
struggled to answer these questions, making business cases
to setup a new plan, or keep one running light on evidence
for sponsors that increasingly demand to know just what they
are getting for their investment.
We’ve been working on the ability to answer these questions
and to enable our customers to benchmark their plan designs
and operating models, not just against local peers, but on a
global scale that is only available with Computershare’s client
base. What better place to start than testing our prototype
on ourselves, like you listed, and with employees either
throughout Australia and New Zealand, or spread around the
world.
Highlights of what we found were:
� Loyalty
In Australia, our average tenue for those who have participated in our contribution plan at least once was 9.69
year, compared to 5.69 years for employees who never have elected to join the plan. That’s a significant difference
and certainly backs up academic research that has suggested share ownership, in particular through employee
contributions leads to more loyal employees.
� Performance
Pleasingly we have proven existing academic hypothesis in relation to employee performance where someone
participates in an employee contribution plan, with Australian employee performance scores being higher on average
should employees have participated in the plan at least once.
� Enrolment method
We have established a framework for analysing participant enrolment method preferences and then to be able to
benchmark employee bases vs. their global peer companies (web and telephone in this market). Preliminary analysis
shows that our telephone enrolment service is three times more popular with women in Australia than with men.
INTELLIGENCE REPORT » Employee share plan trends 7
Data Insights
These findings, enable us to work with clients such as Marks
and Spencer in the UK around developing more effective
communications strategies that target specific employee
demographics and business lines for example, something our
Communications Consulting service is doing much more of in
Australia and New Zealand.
This market leading analysis shows that companies can
achieve measurable benefits through employee contribution
plans.
For companies looking to attract or incentivise talented
people, in a market where wage growth is subdued and
not showing signs of rebounding, this capability proves
scientifically that an effective employee contribution plan is
an important part of an overall remuneration strategy and
importantly delivers an ROI to employers.
We are currently moving into Phase 2 of this development
which involves further customer testing on a global scale
to further refine our methods. We will keep you updated in
respect to our progress through Client Connect as the year
unfolds.
James Marshall
Managing Director,
AU Plan Managers
Case studies
INTELLIGENCE REPORT » Employee share plan trends8
8Case studies South32’s share plan is a critical
contributor in attracting and retaining talent in the industry. The core values of Trust, Care, Togetherness and Excellence, were critical in the plan design and the ensuing communications program.
INTELLIGENCE REPORT » Employee share plan trends 9
Case studies
CASE STUDIES
SOUTH32 — COMMUNICATING WITH CONFIDENCE — BEST PRACTICE APPROACH WHEN ENGAGING A DIVERSE WORKFORCEWhen South32 demerged from BHP in 2015, share scheme
participation by employees was extremely important.
South32 wanted to ensure a continued commitment to broad
based employee share ownership as they were embarking on
a new identity and ensuring all employees were aligned to
South32’s AllShare plan as opposed to BHP’s Share Plus Plan.
South32’s share plan is a critical contributor in attracting
and retaining talent in the industry. The core values of Trust,
Care, Togetherness and Excellence, were critical in the plan
design and the ensuing communications program.
Some of South32’s challenges included cultural, linguistic and
geographical. Communication is translated into four African
dialects, and the plan needed to reach employees in remote
mine sites globally.
The communications program needed to engage each
employee, as it was delivered across seven participating
countries, for employees from various cultural and
educational backgrounds. Furthermore, the program also
needed to deliver on:
� Educating employees in share ownership
� Ensuring it met local tax and legal requirements
� Engaging unions across the various countries
� Had the right call to action to enable easy participation
The program consisted of the following key elements:
� Engaging Computershare to prepare specific
communication for employee plan participants
— Information is made available to all employees either
in hard copy format or via Employee Online, especially
catering for those employees that are mobile during
the offer/vesting period
— Leveraging Computershare’s call centre, which
operates out of Australia, covering Australia,
Singapore and the UK; and South Africa, covering
South Africa, Mozambique and Brazil. Computershare
South Africa also offers a walk in service for eligible
employees to assist with any questions about the offer
communication
� Addressing tax and legal requirements across seven
participating countries — ensuring employee plan
participants had access to tax, offer and vesting
summaries tailored to each of their local tax and legal
regime
� Developing relevant promotional material taking into
account cultural and linguistic differences
— Translated into four local South African dialects; Latin
American Spanish for employees in Columbia and
Portuguese to cater for employees in Mozambique
Since 2015, the communications program has evolved yearly,
taking feedback from employees to optimise the program.
As a result of this program, the plan has seen year on year
participation grown from XXXX to XXXX
Case studies
INTELLIGENCE REPORT » Employee share plan trends10
CSL
Changing plan design to ……..
CSL focusses on rare and serious diseases and influenza
vaccines. They compete on the global stage as one of the
largest and fastest-growing protein-based biotechnology
businesses and a leading provider of in-licensed vaccines.
In 2016, CSL received a first strike from its shareholders
rejecting its remuneration report due to investor concern
over rising executive pay. In 2017, CSL avoided a second
strike against its remuneration report after simplifying the
structure of executive remuneration and incentives.
CSL’s Global Employee Share plan forms a significant
contribution to how executives at CSL are remunerated.
Computershare has been providing plan management
services to CSL for over 15 years including managing their
Global Employee Share Plan in over 30 countries and their
Performance Rights Plan which is offered to their most senior
leaders.
As a consequence of receiving the first strike in 2016, CSL
decided to change their plan by introducing two new rights
plans for their executives. The previous plans included a
cash based phantom plan and CSL were keen to offer equity,
rather than cash to incentivise their executives. This is in line
with ………………………………...
To support CSL in the new plan design, Computershare was
involved in a number of global calls to discuss the plan at
a high level to ensure it would work from an operational
perspective.
In adopting the changes, CSL was initially concerned with
how their overseas based executives would be able to trade
their shares. With the launch of the share sales facility via
Employee Online, concerns disappeared as they knew we had
a solution when required.
What are the new plans?
The Retain and Grow Plan (RGP) are Restricted Share Units
that provides eligible employees with an opportunity to share
in the success of the company, aligned with shareholder
interests. The Executive Performance and Alignment Plan
(EPA) are Performance Share Units and are intended to
incentivise eligible executives and to align the interests of
executives with the interests of the shareholders.
What were some of the challenges?
As a global organisation, CSL had to account for multiple tax
and legal jurisdictions. Having to manage varying quantum
of rights per country based on the size and importance of
that country. Communicating to executives globally was also
significant factor in ensuring executives bought into the new
plan design. Furthermore, having a partner that was able to
support the administration of the global plan was going to be
critical to its success.
Benefits
Multiple benefits were derived from the result of the change
of plan and the approach undertaken to engage staff globally.
Affected staff were highly engaged and they appreciated the
individual 1:1 presentations.
Furthermore, by changing how executives are remunerated,
CSL avoided a 2nd strike in 2017, with 88% of shareholders
agreeing to vote in favour of the company’s revamped
remuneration report.
INTELLIGENCE REPORT » Employee share plan trends 11
Case studies
AGM OUTCOMES
2017 remuneration strike report — ASX 300
Table 3: ASX 300 number of strikes
STRIKE 2014 2015 2016 2017
No. of companies receiving a first strike
14 15 17 10
No. of companies facing a second strike
14 15 17
No. of companies receiving a second strike (company required to put spill resolution)
1 4 1 3*
Spill meetings 0 0 0 0
*Note: it includes AJX who was in the ASX 300 in 2016 but not in 2017
In examining the ASX 300 companies’ remuneration
report resolution, 12 companies received a strike in 2017.
For 10 companies it was a first strike, however for two
companies, Mineral Resources Limited (MIN) and Mortgage
Choice Limited (MOC) it was the second strike. In 2016 MIN
received 49.18% and MOC received 79.54% votes ‘against’
the remuneration report resolution. In 2017 the companies
respectively received 41.48% and 32.00% ‘against’ votes.
As a result of receiving a second strike and in accordance
with the ’two strikes’ rule introduced in 2011 by the Australian
Government, both companies were required to put a spill
resolution to the meeting and if the spill resolution received
more than 50% in favour then a spill meeting would need to
be held within 90 days of the AGM to re-elect the board. Both
companies were not required to prepare for a spill meeting as
the spill resolution received less than 50% of votes in favour.
Alexium International Group Limited (AJX), which was
in the ASX 300 in 2016 but not in 2017, also received a second
strike in 2017 but was not required to hold a spill meeting
as it also received less than 50% of votes in favour of the
spill resolution.
Of the 12 companies receiving a strike, only one decided the
remuneration report resolution on a show of hands, all others
put the resolution to a poll.
ASX 300 companies who received a first strike in 2017
The 10 ASX 300 companies that recorded a first strike in
2017 will now need to prepare and address issues raised
by shareholders on the remuneration report by engaging
in discussions with proxy advisers and large institutional
shareholders on remuneration report policies to avoid a
second strike in 2018 and a possible spill meeting.
Of the 12 companies receiving a strike, only one decided the remuneration report resolution on a show of hands, all others put the resolution to a poll.
Case studies
INTELLIGENCE REPORT » Employee share plan trends12
The remaining 15 companies put the remuneration report
resolution to poll at their respective AGMs. In examining the
poll results, only three companies, receiving more than 25%
of votes ‘against’ the remuneration report resolution, were
required to put the spill resolution to the meeting as required
by the Corporations Act. The spill resolution results for all
three companies were conducted via a poll and no company
was required to hold a spill meeting as all results showed the
spill resolution for each company had received more than
50% of votes ‘against’ the resolution.
ASX 300 companies facing a second strike in 2017
In 2017, 17 ASX 300 companies had to prepare for a second
strike, compared to 15 in 2016 and 14 in 2015.
Two companies facing a second strike were UGL Limited
(UGL) and Cover-More Limited (CVO) — both companies
delisted in 2017 and as a result no Annual General Meeting
was held.
1. All 15 companies who held their AGM decided
remuneration report via a poll.
2. Eight companies received more than 90% of votes in
favour of the remuneration report resolution.
3. Four companies received between 75% to 88 % of votes
in favour of the remuneration report.
4. The three companies who received a second strike,
recorded ‘against’ votes between 32% to 41%.
5. Two companies did not hold their AGM in 2017 as they
were delisted.
INTELLIGENCE REPORT » Employee share plan trends 13
Case studies
Companies facing a spill meeting in 2017
No company in the ASX 300 was required to hold a spill meeting in 2017. A spill meeting is required to be held when a spill
resolution receives more than 50% of votes in favour.
Table 4: 2017 ASX 300 poll vs show of hands summary
REMUNERATION REPORT (COMPANIES RECEIVING FIRST STRIKE)
REMUNERATION REPORT (COMPANIES FACING A SECOND STRIKE)
SPILL RESOLUTION (COMPANIES RECEIVING A SECOND STRIKE)
SPILL MEETINGS TO BE HELD
POLL 9 15 3 N/A
SHOW OF HANDS 1 0 0 N/A
RESOLUTION NOT PUT TO THE MEETING
N/A 2 N/A
TOTAL 10 17 3 0
In examining the poll results, only three companies, receiving more than 25% of votes ‘against’ the remuneration report resolution, were required to put the spill resolution to the meeting as required by the Corporations Act.
INTELLIGENCE REPORT » Employee share plan trends14
Executive Summary
14Global
insights
While it’s not quite tax “reform,” at least for individual taxation, major tax-law changes have now been adopted.
INTELLIGENCE REPORT » Employee share plan trends 15
Global insights
GLOBAL INSIGHTS
USA — New US tax law affects employee equity plans
At the end of 2017, the U.S. Congress passed the “Tax Cuts &
Jobs Act”, and the president signed it into law. The provisions
under this law go into immediate effect and will affect taxes
on equity compensation in 2018. Following is an excerpt from
an article by Bruce Brumberg, editor-in-chief and founder of
myStockOptions.com, an independent and unbiased source of
expertise on stock options, restricted stock, restricted stock
units, performance shares, stock appreciation rights, and
employee stock purchase plans.
While it’s not quite tax “reform,” at least for individual
taxation, major tax-law changes have now been adopted. The
Tax Cuts & Jobs Act has provisions that directly and indirectly
affect stock compensation, whether in personal financial
planning or in company stock plan administration. Compared
with some earlier proposed provisions that didn’t survive the
legislative process, these are not really significant beyond the
change in the alternative minimum tax (AMT), which affects
incentive stock options.
The core tax treatment of stock compensation has not
changed. Below are the provisions that affect individual
taxation of stock compensation. (The individual tax rates and
AMT changes end after 2025, reverting to the current rates
unless extended.)
1. Changes in the rates of individual income tax. The Tax
Cuts & Jobs Act keeps the current seven tax brackets,
reducing the rates and changing the income thresholds
that apply. The new rates are 10%, 12%, 22%, 24%, 32%,
35%, and 37%, with the top bracket starting at $600,000
for joint filers ($500,000 for single filers).
The flat supplemental rate of federal income tax
withholding on stock compensation is based on the seven
brackets. For amounts up to $1 million it is linked to the
third lowest rate (22%). For amounts over $1 million
it is linked to the highest rate (37%). The 22% rate of
withholding may not cover the actual taxes you will owe,
so you need to know the tax bracket for your total income
and assess the need to put money aside or pay estimated
taxes.
2. Changes in the calculation of the alternative minimum
tax (AMT). The income spread at incentive stock options
(ISOs) exercise can trigger the AMT, which warrants
complex tax planning. While the AMT or how it applies to
ISOs is not repealed, below are the new numbers in the
AMT calculation (to be adjusted annually for inflation).
� The 2018 AMT income exemption amount rises to
$70,300 (from $54,300) for single filers and to
$109,400 (from $84,500) for married joint filers.
� The income where this AMT income exemption starts
to phase out in 2018 is substantially adjusted upward
to begin at $500,000 for individuals (from $120,700)
and $1,000,000 (from $160,900) for married couples.
These higher AMT income exemption amounts, and the
much higher income point where the phaseout starts,
make it much less likely that ISOs will trigger the AMT.
With fewer employees at risk of triggering the AMT by
exercising ISOs and holding the shares, companies may
start to grant ISOs more frequently, given their potential
tax advantages for plan participants.
What pays in part for this change in the AMT calculation
is the $10,000 cap on the deduction for state and local
income taxes and real-estate property taxes on tax
returns. Given the odd way in which the AMT is calculated,
those deductions may have triggered or added to your
AMT in the past. Strangely enough, given that new cap, a
taxpayer who has been paying the AMT may see less tax
savings than they might otherwise expect to get from the
AMT change.
Global insights
INTELLIGENCE REPORT » Employee share plan trends16
3. New type of qualified stock grant for privately held
companies. The final legislation adopted as one of its
provisions a version of the Empowering Employees
Through Stock Ownership Act. This provision lets an
employee in a privately held company elect to defer taxes
at option exercise or RSU vesting for up to five years
as long as the company’s equity awards meet certain
conditions (the version of this provision that passed the
House in 2016 allowed seven years).
4. No change in the capital gains rates (15% and 20%).
A reduction in ordinary income rates would lower the
difference between your income tax rate and your capital
gains rate. This reduced differential might affect your
tax-planning decisions, e.g. whether to hold shares at
exercise, vesting, or purchase. While there is no change in
these rates, the tax law creates a new income threshold
for when the rate on long-term capital gains and qualified
dividends goes from 15% to 20% ($479,000 for married
joint filers and $425,800 for single taxpayers). That
threshold is no longer similar to that of that top tax
bracket.
1 2016 Employee Stock Purchase Plan (ESPP) Survey (July 2016)2 2016 Employee Stock Purchase Plan (ESPP) Survey (July 2016)3 ESPP Design and Participation Analysis, Computershare and Aon (May 2017)
Furthermore, while the Republican Congress did not seek
to alter the capital gains rates themselves, they do still
want to repeal the 3.8% Medicare surtax on investment
income, including stock sales, that is paid by high-income
taxpayers to fund Obamacare. The new tax law simply
repeals the penalty for not buying health insurance.
5. Repeal of the performance-based exception to the
Section 162(m) limit on deductible compensation.
Publicly traded companies will no longer be able to deduct
annual performance-based compensation (e.g. stock
options, performance shares) in excess of $1 million for
the CEO, CFO, and the top three highest-paid employees.
For compensation paid under written plans existing as of
November 2, 2017, an exemption applies as long as the
plan is not modified. While that repeal does not affect
financial planning, it further reduces the incentive for
companies to favor one type of equity award over another.
For further details about the impact of the tax legislation on
equity comp, including links to in-depth tax resources, visit
myStockOptions.com.
ESPPs CONTINUE TO GROW AMONG US COMPANIES
Another area of growing interest in the U.S. is in the
employee stock purchase plan (ESPP). This contributory plan
allows employees to have a portion of their salary withheld
from each pay check and then used to purchase stock in the
company, often at a discount.
In a study in 2016 conducted by the National Association
of Stock Plan Professionals (NASPP), the National Center
for Employee Ownership (NCEO) and the Certified Equity
Professional Institute (CEPI), 88% of all respondents
offered an ESPP. An additional 7% were in the process of
implementing or at least considering an ESPP.1
The same study showed that among those companies that
offer an ESPP, 92% are tax-qualified plans. A tax-qualified
plan provides certain tax benefits to participants if the plan
meets specific plan design criteria. Companies may also offer
a non-qualified plan, which has no design restrictions but also
no special tax benefits.2
Computershare’s U.S. Plan Managers also partnered with
Aon in 2017 to do a comprehensive review of plan design and
participant behaviour among its 240 ESPP clients and their
collective 1.8 million plan participants.3 Some of the more
interesting data points out of this study included:
INTELLIGENCE REPORT » Employee share plan trends 17
Global insights
� Participation in terms of how many employees enrol in
the ESPP and their average contribution rates are higher
among tax-qualified plans versus non-qualified plans.
� More time between purchases is more common than less
time. Monthly purchases are the most popular, followed
closely by quarterly and semi-annually. The longer
timeframe between purchase periods can help reduce the
administrative burden and may create more excitement
among participants, as each purchase becomes more
of an “event”. Interestingly, annual purchases are fairly
uncommon, likely because it is too long to ask participants
to have their contributions tied up prior to a purchase.
� The most common discount is 15%, which is the maximum
allowable for a tax-qualified plan. Although the higher
discount means a higher tax cost for the employer, it
also means higher participation, which is likely why most
employers prefer it.
4 Computershare Share Plan Survey (2014)
There is no clear evidence or consensus as to the reason why
ESPPs are on the rise. However, in the U.S, wages have been
stagnant over the past decade. ESPPs are an inexpensive
way to offer broad-based stock ownership. It is possible
that offering employees an ESPP with a discount or a
company match is a way to provide additional compensation
to employees at relatively low cost. It is also true that
participation in an ESPP correlates with better employee
behaviour, including higher productivity, fewer absences, and
a more positive attitude towards the company. This might
also account for the uptick in plan interest.4
Computershare’s US Plan Managers regularly holds webinars
on various topics related to employee stock purchase
plans, such as understanding the costs of ESPPs, trends in
plan design, and employee communications. Participation
in these webinars is very strong, with several hundred
issuers attending. In fact, interest is so high in this area
that Computershare is launching the first-ever ESPP Day
conference, a one-day event dedicated to educating issuers
on ESPP--where attendees will learn how these plans work,
how to implement one, the very best ways to communicate
a program and much more. The event will be held February
8, 2018 in New York City. Interest is already so high, that
a second event is planned for November 2018 in the San
Francisco area.
The longer timeframe between purchase periods can help reduce the administrative burden and may create more excitement among participants, as each purchase becomes more of an “event”.
Global insights
INTELLIGENCE REPORT » Employee share plan trends18
Asia
An encouraging year with strong enrolment rates and State support
The previous trends of employee share plans in the Hong
Kong/China market have continued, particularly where
companies are moving from Stock Appreciation Rights
and Stock Option Plans towards Restricted Share Awards
(Executive) and broad-based Employee Share Purchase Plans
(ESPPs). Of the companies offering ESPPs, the majority offer
a share match incentive (versus discount). As these share
plans provide many Chinese employees with the opportunity
to hold overseas listed shares, we have witnessed strong
enrolment rates within China compared to other global
jurisdictions. This is obviously dependent on the development
of effective communications strategies for these plans that
are tailored to local languages.
From a regulatory perspective, over the past few years, the
China Securities and Regulatory Commission (CSRC), the
Ministry of Finance (MoF) and the State Administration of
Tax (SAT) have published circulars that further clarify the
treatment of employee equity as well as promote the use of
employee equity incentives in the China domestic A-share
market. Furthermore, in the past year China announced
plans to ease ownership limits on foreign joint ventures and
Shanghai State Administration of Foreign Exchange (SAFE)
simplified the registration and submission process.
Shanghai SAFE changes its registration submission process
With the increase in overseas listed companies offering
employee share incentive plans in China, the local regulators
sees the need to address the strict foreign exchange policy.
In 2007, PRC State Administration of Foreign Exchange
(“SAFE”) released, the first related regulation, circular 78,
specific to the movement of funds resulting from Chinese
Nationals participating in overseas listed share incentive
plans. However, as many practical administrative procedures
was unclear, SAFE replaced this circular with a more coherent
and clear but more stringent guide, Circular 7, in Feb 2012.
This guide clearly states the requirements for overseas listed
companies and their responsibilities for adhering to SAFE’s
regulations, including:-
� Share plan registration requirements
� Centralised foreign exchange bank account setup
� On-going plan quarterly report filing to SAFE
� On-going changes report filing
� On-going annual report filing and renewal of SAFE Quota
Effective from October 2017, the Shanghai Branch of the PRC
State Administration of Foreign Exchange (“SAFE”) requires
companies that maintain, or plan to maintain, their dedicated
foreign exchange account with Bank of China, Citibank or
HSBC are to submit registration applications under Circular
7 to the three banks, rather than directly to Shanghai SAFE.
Applications submitted to the three banks enjoy priority to
be reviewed by Shanghai SAFE, but Shanghai SAFE retains
the authority to review and approve any applications.
Companies that do not maintain or plan to maintain their
dedicated foreign exchange account with these three banks
are expected to continue to submit their applications directly
to Shanghai SAFE. If the new submission process works to
Shanghai SAFE’s satisfaction, Computershare expects that
this approach may be adopted in out tier one cities and /or
expanded to include more banks.
Further opening up of China finance sector to more foreign ownership
As a result of US-SINO presidents meeting, , on 10th November
2017 the Chinese government announced plans to ease limits
on foreign ownership of financial services groups, including
commercial banking, securities, futures, asset management
and insurance. Foreign investments in securities, futures and
funds management may increase the ownership limit from
49% to 51% maximum, and such limit will be eliminated three
years later where foreign investors are allowed to wholly own
the company in these three financial industries. Following Xi’s
new leadership, China is committed to financial liberalization
and opening up to allow greater market access for foreign
investors. Computershare expects that specific rules and
regulations with respect to the implementation of this policy
will be released in the coming year.
Seth Bohart Managing Director, Computershare Plan
Managers Asia
INTELLIGENCE REPORT » Employee share plan trends 19
Global insights
UK & Europe
UK all employee plans
Save-As-You-Earn (SAYE) and Share Incentive Plan (SIP)
are the most popular UK all employee plans give their tax-
advantaged status. Their wide adoption gives us a rich source
of data from which we can draw conclusions on the relevance
and attractiveness of employee share ownership.
With both SAYE and SIP benefiting from an increased
maximum monthly contribution limit in recent years, the
positive trend in average monthly contribution, whilst
unsurprising on the surface, seems to indicate positive
sentiment for these savings and investment vehicles.
SAYE & SIP AV. MONTHLY CONTRIBUTION
2012 2013 2014 2015 2016
SAYE (ACROSS ALL GRANTS)
£106 £108 £123 £156 £158
SIP £83 £66 £80 £89 £89
Source: ProShare SAYE & SIP Report 2016
5 Attitudes to Employee Share Ownership, ProShare, 2017
While SAYE remains more popular than SIP overall, SIP
participation is in decline, dropping 8% in four years. SAYE
has enjoyed rising participation in recent years, but has flat-
lined year-on-year for 2015-16. This indicates that perhaps
employees have reached their peak ability to invest post
recession. However, soon to be published figures for 2017 will
confirm if this trend continues.
SAYE & SIP AV. PARTICIPATION
2013 2014 2015 2016
SAYE / 33% 36% 36%
SIP 37% 33% 31% 29%
Source: ProShare SAYE & SIP Report 2016
A recent study5 offers some new and insightful analysis for
the share plan industry to consider in terms of launching
and targeting plan types based on gender, age and other key
drivers.
For SAYE, ‘affordability’ has been cited as the most common
reason for non-participation across all age-ranges in the
workforce — 40% said they couldn’t afford to take part.
Contrary to a widely-held assumption, only 7% of Millennials
said that they didn’t think they’d be at the company long
enough to benefit - the lowest score across all age groups. Is
there more employer loyalty in this age segment than they
are given credit for?
When asked what changes would make SAYE more attractive,
non-participants most commonly cited a shorter savings
term (companies can offer three- or five-year plans), closely
followed by the ability to vary the monthly contribution
(currently employees have to choose a fixed amount for the
duration of the plan).
When looking at SIP, reasons for non-participation again lead
with affordability, followed by a lack of understanding of how
the plan works.
There are many more insights to be drawn from this study,
which together can be viewed as a catalyst for a more
informed debate about share plans. It is clear that there are
segments of the workforce who feel that share plans are not
for them, are unaffordable, or are too complicated or risky.
With SAYE and SIP approaching 40 and 17 years old
respectively, thoughts in the industry are starting to align
behind lobbying for updates to these plans with some
recent success seen in extending the ability to pause SAYE
contributions from 6 to 12 months. These changes are being
seen as increasingly important in ensuring they remain
relevant and able to meet the objectives of both employer
and employee long into the future.
Global insights
INTELLIGENCE REPORT » Employee share plan trends20
Discretionary plans
There has been little change overall in the UK and Europe
around LTIP practice, with full-price share awards still
favoured over options. LTIP design still centres on
performance shares instead of restricted stock and their
use is predominantly saved for executives and senior
management.
Looking at executive remuneration through the lens of
corporate governance reveals a number of proposals and
policy announcements this year:
� In March, Germany introduced clawback provisions on
bonus payments for top managers and material risk
takers in the banking sector. Grants will be subject to
clawback for a minimum of five years, and would be
triggered in the event that an individual had caused
regulator sanctions or massive loses. This is first time
clawback has been prescribed in German law, and brings
policy more closely in line with the UK.
6 Review of FTSE 100 Remuneration Reports for 2016/17, Tapestry
� In the light of two high profile business failures, BHS
and Sports Direct, a UK Government report in April 2017
raised proposals to hold directors to account and align
bonuses with broader corporate responsibilities and
objectives. It also proposed the phasing out of LTIPs
(to be replaced with restricted or deferred shares) - the
idea being that long term awards should be more closely
aligned to share price increase than complex shorter term
performance conditions.
� Reforms to the UK Corporate Governance Code
introduced in August 2017 again focused on executive pay.
Companies are to be required to publish the ratio of CEO
pay to average UK worker pay, and provide a narrative to
explain changes and context.
� Continuing the theme of increasing shareholder
disclosure, further updates to the Investment
Association’s Principles of Remuneration were published
in November 2017 to ensure executive remuneration in
the UK is well designed and justified in the context of the
company, its business, its performance and, increasingly,
its wider workforce.
Policy announced in previous years is starting to show and
impact in remuneration practice. In a review of FTSE100
Remuneration Reports for 2016/176, post-vest holding periods
have become more prevalent. 73 companies now enforce
holding periods, up from 53 in the previous report. The report
also highlighted an upward trend in executives being required
to hold shares beyond termination, ensuring they don’t sell
prior to potential problems being revealed.
Looking at executive remuneration through the lens of corporate governance reveals a number of proposals and policy announcements this year
INTELLIGENCE REPORT » Employee share plan trends 21
Global insights
Market and Regulatory round-up
Global equity markets continued the upward trend that began
towards the end of 2016. The weak Pound, continued low
interest rates, the failure of populist political movements in
Europe, and the promise of new tax law in the US are but a
number of factors that have combined to ensure a record
year for markets.
As a result, the fear of negative interest rates for the UK
failed to materialise, with central banks tending to maintain
rates or implement small increases (as was the case in the
UK). As a result, the viability of UK SAYE plans, which are
underpinned by the earnings from savings balances, is no
longer under question.
The regulatory conversation has been dominated by two
pieces of European law:
1. Markets in Financial Instruments Directive II (MiFIDII)
— seeking to strengthen investor protection and increase
confidence in markets, MiFIDII has introduced significant
changes for plan administrators, issuers and participants.
From January 3 2018, any participant trading from a
plan will now need to provide a form of identification.
There are now more stringent regulatory reporting
requirements a requirement to produce quarterly
statements for account holders. Significant efforts
have been made to develop systems to support these
requirements and communicate these changes to our
clients and participants.
2. European General Data Protection Regulation (GDPR)
— GDPR finally comes into effect in May. Computershare
have been working closely with clients to understand and
prepare for the changes, particularly in ensuring that
contracts, terms and conditions and privacy statements
are compliant, and that the necessary consents are
in place for the flow of data that is so crucial to plan
administration can continue.
Regulatory changes are part of the modern landscape
impacting share plan schemes and remuneration.
However, with continuing political and policy
developments in Europe coupled with the impact of Brexit
and the introduction of gender pay gap reporting in UK
the next few years will likely have significant impact on
the industry.
Regulatory changes are part of the modern landscape impacting share plan schemes and remuneration.
INTELLIGENCE REPORT » Employee share plan trends22
Executive Summary
22Perspectives
INTELLIGENCE REPORT » Employee share plan trends 23
Perspectives
PERSPECTIVES
Allens Linklaters
Insights into Employee Equity Trends — Tax and Regulatory
Environment (Australia) 2017
1. Tax and regulatory changes and their practical impact
on listed companies
1.1 Changes to the taxation of employee share schemes
As we have previously reported, sensible legislative
changes were made to the taxation of employee share
schemes (ESS) in Australia for awards granted on or
after 1 July 2015. One of the main implications of those
changes was to generally move the taxing time of rights/
options from vesting to exercise. As a result of these
changes we have seen in the last year some employers
return to granting performance rights which include an
exercise period post vesting of those rights.
1.2 Tax rulings in 2017
The Australian Taxation Office (ATO) issued six Class
Rulings dealing with employee equity awards. The Class
Rulings mainly relate to corporate events affecting
shareholders that also had some impact on employee
equity awards (i.e. Centuria Group’s restructure to
form a stapled security structure (CR 2016/90), the
Asciano takeover and special dividend (CR 2016/94), the
Afterpay Holdings Limited merger (CR 2017/50), Alcoa
Corporation’s separation from Alcoa Inc (CR 2017/59)
and Kore Potash Limited’s re-domiciliation to the UK (CR
2017/88)). Very generally, it would appear that in each
of those rulings sensible tax outcomes were able to be
achieved for the employee equity award holders. The
Pfizer Inc. Class Ruling (CR 2017/83) considers the tax
consequences for employees who participate in Pfizer
Inc’s employee incentive schemes.
In 2017 the ATO also issued the following ESS products:
(a) Tax Determination TD 2017/26 Income tax: employee
share schemes - when a dividend equivalent payment
is assessable to an employee as remuneration. In the
TD, the ATO states that a dividend equivalent payment
paid by the trustee of a trust to an employee will be
assessable to the employee as remuneration under
section 6-5 of the 1997 Act where the employee
receives the payment for, or in respect of, services
provided by the employee, or more generally, where
the payment has a sufficient connection with the
employee’s employment. This reverses the position
that the ATO had previously adopted at paragraph
40 of Class Ruling CR 2013/15. This is also the case
notwithstanding that the trustee is likely to have paid
tax on the underlying dividends received by the trust
at the top rate under section 99A of the 1936 Act.
Appendix 2 to the TD (which replaces PCG 2017/D9)
sets out the Commissioner’s practical administration
approach as to when he will accept that a dividend
equivalent payment is not for, or in respect of, services
provided as an employee. Some of the requirements
are that the trustee of the trust must not be an
associate of the employer and the dividend equivalent
payment must not be paid in relation to the employee’s
continued employment. Furthermore, the dividend
equivalent payment must not arise from a contractual
agreement to which the employee and employer are
party and it cannot be paid by the employer, in lieu of
the trustee making the payment. In practice, employers
do not generally implement arrangements of the type
that would satisfy all of the safe harbour requirements,
and therefore the safe harbour is unlikely to have
much practical application. The TD applies to dividend
equivalent payments where they are paid under the
terms and conditions attached to ESS interests granted
on or after 1 January 2018. For ESS interests granted
before 1 January 2018 that have dividend equivalent
entitlements, the ATO’s general administrative practice
will be to treat any such dividend equivalent payments
as not assessable to the employee as ordinary or
statutory income (provided that the dividends were
assessed to the trustee under section 99A in the
income year in which the dividends were received).
Perspectives
INTELLIGENCE REPORT » Employee share plan trends24
(b) Draft Ruling TR 2017/D5 Income tax: employee
remuneration trusts, which replaces Draft Ruling TR
2014/D1. The ATO’s views in TR 2017/D5 have not
materially changed from those expressed in TR 2014/
D1 except that TR 2017/D5 excludes ESS to which
Division 83A applies (which is welcomed news for listed
companies operating employee share trusts).
1.3 Regulatory developments
The Australian Securities and Investments Commission
(ASIC) Class Order CO 14/1000 continued to facilitate
the operation of ESS of ASX-listed entities, and entities
listed on certain foreign exchanges, by providing
welcome corporate regulatory relief. During 2017, ASIC
expanded the range of foreign exchanges to include
Euronext Brussels and Euronext Lisbon. The regulator
also continued to expand on the relief in individual cases
to address circumstances not captured by the Class
Order but nevertheless consistent with its underlying
policy. We have outlined examples of such expansions in
previous updates, including the relaxation of the criteria
for an entity’s contractors to participate in an ESS, the
extension of the relief to other types of ESS interests,
and the removal of the three-month listing requirement
for eligibility (in particular in the context of corporate
transactions such as mergers and demergers). Of
note this year was ASIC’s willingness to adapt the ESS
trust requirements in the Class Order to accommodate
analogous foreign custodian arrangements for a French
entity.
In separate developments, the Federal Parliament
has passed the Government’s Banking Executive
Accountability Regime (BEAR) legislation. When it
commences, the BEAR will impose a range of new
obligations affecting authorised deposit-taking
institutions (such as banks, building societies and credit
unions) (ADIs) and their subsidiaries, directors and senior
executives. In part those obligations are designed to
influence the remuneration received by such directors
and executives, including remuneration provided
under ESS.
Under the BEAR, ADIs will be required to defer portions of
the annual variable remuneration (ie remuneration that is
conditional on the achievement of objectives) of relevant
directors and executives for a period of four years.
Depending on the size of the institution and whether or
not the relevant person is the CEO, the required portions
range between 40 per cent and 60 per cent of variable
remuneration or between 10 per cent and 40 per cent
of total remuneration, whichever is lower. The deferral
will not automatically end if the relevant individual
ceases employment (although from a tax perspective
that remains a deferred taxing point). However, an
application can be made to APRA to shorten the four
year period where, among other things, the person has
ceased to be an accountable person of the ADI. The ADI
will also be required to adopt and enforce remuneration
arrangements that require the variable remuneration
of a relevant person to be reduced by an amount that
is proportionate to any failure by the person to comply
with their personal obligations under the BEAR. These
arrangements have clear implications for the design
and implementation of ESS for ADIs, and will need to be
worked through carefully before the commencement of
this component of the BEAR in January 2019 (or July
2019 for small and medium ADIs).
2. What we expect to see in 2018
(a) In April 2017 the ATO released a consultation paper
seeking industry input to help shape the ATO’s public
guidance on the operation of the ESS tax provisions
in Division 83A (submissions closed on 7 June 2017).
The ATO is understood to be working on updates to
its ESS guidance materials. It is hoped that the ATO
will clarify its views in relation to dividend waivers
and employee share trusts amongst other areas of
uncertainty in the application of Division 83A.
(b) Some guidance from the ATO on its view of fixed
remuneration equity arrangements involving locked
up shares which may have previously been offered as
post-tax shares (e.g. NED Share Plans) being delivered
as the grant of rights to shares.
INTELLIGENCE REPORT » Employee share plan trends 25
Perspectives
(c) In executive share plans:
(i) A continued increase in cash discretions in scheme
rules for rights plans as a useful tool to achieve
sensible tax outcomes for equity award holders
in various circumstances, including on cessation
of employment before vesting and where there
is a corporate event impacting both shareholders
and employee equity awards (eg. see the Centuria
Group Class Ruling CR 2016/90).
(ii) A review of performance conditions to ensure they
continue to be relevant and motivating.
(iii) Continued tweaking of scheme rules to ensure
appropriate clawback rules and alignment with
termination benefit restrictions.
(d) In all employee share plans:
(i) Consideration of whether changes to the plan rules
are needed, given the rapidly changing work-force
(e.g. should the vesting periods be shorter, should
the category of participants be broader, should
there be pausing in vesting for career breaks?).
(ii) More creative thinking about whether the plans
could be used more effectively to meet company
goals which require buy-in from the whole work-
force (e.g. level of matching awards linked to safety
or environmental goals rather than only retention).
KPMG
Expert insights in to employee equity trends in Australia: market trends for this year and what’s on the horizon.
Employee share schemes (ESS) are common practice across
the ASX 150, with companies investing significant time and
financial resources to design, implement and manage the
resulting plans.
Due to the significant investment, Boards are asking, are
we getting bang for our buck? How do we bring equity back
to life?
The answers are:
� Restore value to these plans (even if reducing quantum)
� Clearly link them to strategy and performance
� Communicate communicate communicate (and clearly)
1. Enough is enough
Boards are well aware of community and political concern
at the quantum of executive remuneration.
There is a breakdown in trust between shareholders and
boards (that shareholders do not trust Boards to do the
right thing) and often between Boards and management
(to the detriment of optimising performance) where
Boards make ‘populist’ decisions to exercise discretion
against management.
This will no doubt be exacerbated by the introduction
in the UK and US by the publication of the CEOs pay as
a multiple of average workers income, which will also
operate to highlight the gap for employees which in
turn will also create distrust between the top levels of
management and the rest of the organisation.
To date, equity has played a role in bringing employees
across the whole organisation together, with the intention
that with ‘skin in the game’, employees at all levels are
more likely to ‘act and think like an owner’ (leading to
increased productivity and long term decision making).
In turn, theoretically, employees should also reap the
benefits of the dividend distributions and share price
growth which they have helped to deliver. However, this is
not always the case.
Perspectives
INTELLIGENCE REPORT » Employee share plan trends26
2. What has failed in our current structure?
Many Boards have taken the opportunity on a change in
leadership to reduce fixed pay levels of senior executives.
However, it is often the part of remuneration that is
variable (ie STI and LTI) that attracts the largest level of
scrutiny. The quantum of incentives, especially of LTIs,
has increased as downward pressure has been exerted
on fixed pay — amplified for LTIs because of the lower
likelihood of vesting.
However, research shows that in volatile industries, where
it is difficult to set long term targets, three or four years
out from vesting, LTIs do little to motivate and executives
place a heavy discount on their existence — particularly
where vesting is dependent on an external measure,
perceived to be outside the control of management (eg,
relative Total Shareholder Return). While there is clearly
a strong relationship between company performance
and share price, the two are not always immediately
temporally linked (whether because of extraneous market
factors or because ‘good’ results do not meet with
analyst’s expectations leading to a ‘correction’).
Similarly, at lower levels across the organisation, where
significant investment is made in administering broad
based ESS plans to encourage employees to ‘think and
act like shareholders’ and ‘share in the success’ of the
company, some companies struggle to get employees
to see the benefits in participating in these plans. In
other companies, where offers have been made year on
year, it has become an expectation of employees that
they are simply ‘gifted’ equity each year. The offer does
not link company performance with the annual grant of
shares and the reduction or removal of such an offer can
actually act as a demotivator. This is especially true, when
employees consider top management are being paid the
‘big bucks’.
So how do we get equity to work as we intend it to?
3. Solving for the executive level
The purpose of long-term incentives (LTI) is to attract
top talent, retain that talent and reward delivering the
company’s long-term strategic priorities. These plans
should ideally be a tool within the CEO and Board’s
‘people tool-kit’.
However, the LTI often does not serve these purposes:
� Infrequent vesting, ie a company that does not have
a good track record of LTI vesting, whether because
of performance or circumstance, will often find the LTI
is not valued by prospective employees and will often
not be valued by existing executives — meaning it does
not play its role in attracting or retaining talent;
� The ‘set and forget’ phenomena, ie once an LTI grant
is finalised, performance periods are often set to run
their course with little to no engagement on progress
against the specified goals during the period. LTIs are
intended to drive performance over the long-term,
however if there are no consistent check-ins on how
the team is progressing towards targets, does it fulfil
this purpose?
� Offer documentation is often overly complicated,
crippled with legal jargon, and fails to excite
participants to deliver exceptional results. Having
invested considerable money, time and effort in
developing incentive programs to drive performance,
it is this last and most important step that is often
given the least amount of attention
The emergence of the variable reward plan
A growing number of companies are adopting so called
‘single’ incentive or reward plans, in place of STI and LTI.
These plans, which combine elements of short and long
term plans by testing against an annual scorecard of
measures but providing the vast majority of rewards in
long deferred equity, attempt to simplify remuneration
structures, better align rewards with evolving strategic
plans and to allow recalibration in the volatile and
disrupted markets in which many companies now operate.
INTELLIGENCE REPORT » Employee share plan trends 27
Perspectives
While generally offered at a discount to the former
overall opportunity offered, as a quid pro quo for greater
certainty, the variable reward plan has been introduced
to restore value of these remuneration programs to
senior executives through making the performance
measures more immediately within line of sight while
tying the ultimate value of those rewards to the delivery
of the company’s strategy and ultimately the longer
term experience of shareholders by granting most of the
reward in shares that are deferred over the longer term.
There are multiple variations of these plans, but a
common thread to all is that a very large portion of the
award is delivered in equity, and this equity is ‘locked up’
so that a executives hold a significant financial interest
in the company throughout their tenure, to cultivate the
ownership mentality Boards are seeking to encourage.
Dividend entitlements (or dividend equivalent payments)
are an important part of the share ownership experience
and provide a cash flow to participants in place of the
former cash STI. This latter objective can prove a little
tricky as a result of unnecessarily restrictive tax rules.
Introduction of strategic measures
Rather than completely redesign their plans, some have
instead decided to introduce performance measures into
long and short term plans that better align with long term
company strategy (not just financial performance). While
there have been some spectacular fails in the introduction
of such measures, companies that can articulate the
importance of the relevant measures to their future
business success and explain how these performance
targets will be measured or quantified tend to have
garnered shareholder support for an element of reward
plans being tied to strategic (and often non-financial)
goals.
APRA and ASIC have both publicly supported the
introduction of such measures as an appropriate counter-
balance to simply pursuing financial outcomes at the
expense of long term health of business.
4. Solving for the broader employee population
A broad based ESS is a good way of engaging employees
to think as owners of the business. Anecdotal success
stories regarding such schemes indicate that they can
provide employees with a true sense of ownership and
alignment with corporate strategy.
The taxation regime regarding broadly based employee
share schemes is decades out of date — with the $1000
tax free threshold not having been revised since the
legislation was introduced. Notwithstanding strong
industry and corporate lobbying, this regime has not been
revisited — effectively emasculating the potential power of
such schemes.
Research undertaken by the Australian Office of the
Chief Economist suggests that when compared with their
non-ESS counterparts, companies with ESS plans have
lower employee churn, higher sales, higher value added,
higher labour productivity and higher value added growth.
However, this link weakens as companies get larger and
older indicating that, if a causal relationship exists, the
benefits of ESSs are greatest for small businesses . This
could be due to the fact that larger and more mature
companies:
� Are less likely to achieve significant share price
growth therefore employees don’t ‘value’ their equity
as highly.
� May have offered ESS plans for a longer period and
have become an ‘expectation’ of employees, and their
purpose (of building an ownership culture) has been
‘lost in translation’ over the years.
Perspectives
INTELLIGENCE REPORT » Employee share plan trends28
Re-invigorating the traditional ESS
While not offering such schemes in a year may send a
clear message that these plans should not be expected,
such a drastic act may cause widespread dissatisfaction
amongst the workforce. Instead of this extreme, it is
possible to send the message without revoking such
schemes by:
� Introducing a well-publicised performance gate before
such plans are offered each year;
� Reducing the amount that is offered (ie below
the $1000 maximum) in years where corporate
performance does not hit a target; or
� Offering the plan on a co-contribution basis (ie the
company will provide $500 of shares where the plan
participant agrees to sacrifice $500 of his or her
wages
or salary into shares) in years where performance is
not as good.
Any of these mechanisms can reintroduce an element of
balance where such annual grants are merely expected by
employees without any reference to the performance of
their employer.
5. Create a buzz
Effective communication of plans are critical. Companies
should be revising their communication plans to create
excitement and engagement at the time of offer and
throughout the plan cycle and realise the full potential of
using the equity delivered under the ESS plans as a tool to
develop an ‘ownership’ culture amongst employees and to
drive performance.
This should include:
� when designing plans, involving participant to ensure
the final design is meaningful to them
� revisiting offer documentation to engage and excite
participants
� designing a communications program, involving
multiple touch-points over the plan cycle, to ensure
that participants are connected to their plans through
that cycle — whether this is updates regarding shares
price, dividends/distributions, how the company is,
or individuals are, progressing against performance
targets or gateways.
Plan design, together with ongoing and meaningful
engagement with participants, is critical to realising the
full potential of ESS plans — both at an executive level and
across the organisation more broadly.
Stephen Walmsley
Partner
Leadership, Performance & Reward
Alice Bungey
Senior Manager
Leadership, Performance & Reward
Maddy Dickson
Manager
Leadership, Performance & Reward
INTELLIGENCE REPORT » Employee share plan trends 29
Perspectives
Deloitte
International tax insights
While the taxation of incentives in the hands of permanent
and long-term deployed employees remains testing, it is the
short term business traveller who is now proving to be a
greater compliance challenge for companies. This coupled
with the rise of the contingent and transient workforce will
add even more complexity to the challenge of remaining
compliant when making incentive award grants to mobile
employees.
Business Traveller’s — why is this important now?
A combination of: tax authorities seeking to increase
revenues and close the “tax gap”; intensified sensitivity
around economic migration; and historic non-compliance
with tax obligations has meant that BTs are now a key area of
focus across the globe.
To date, it is the ‘major’ economies that have led the way in
terms of legislating in respect of BTs and providing guidance
on compliance best practice. For example, the UK Short
Term Business Visitor program allows companies to make
an annual submission to HM Revenue & Customs (HMRC) in
respect of their qualifying BT population rather than operate
monthly payroll withholding/reporting (PAYE). Similarly,
in Canada, there is payroll withholding relief available for
qualifying BTs in addition to the waivers available for certain
non-resident employees. The unavoidable flipside where
regulators have provided concessions, is that authorities
demand companies to be compliant and penalties and
interest for non-compliance are greatly increased.
In Australia and other countries that levy tax at the regional/
state level, awareness of inter-state travel is also vital to
ensure compliance at the regional/state level. For state
payroll tax purposes in Australia, if there are incentive plan
participants working in multiple states (or territories) in the
calendar month in which the award is paid or payable then
analysis is required to determine where payroll tax is due.
For example, it could be one of the states that the employee
worked in or the state in which the employer is based.
Compliance activity by regional/state tax authorities focuses
in on inter-state travel.
Sharing of data using the latest technology allows
immigration and tax authorities allows for real time
tracking. This has led to a noticeable increase in the audit of
companies with BTs for non-compliance. Unsurprisingly, audit
activity is most common in the USA, particularly at a state
level with California and New York state leading the charge.
As an example, New York has requested details of expense
and travel histories for the higher paid employees in many
financial services companies that have a known international
presence. Also, north of the border in Canada, the tax
authorities have been pro-actively requesting information
on BTs when a company discloses global transfer pricing
information on the Form T106.
It would be reasonable to expect similar practices in other
countries in the coming years as tax authorities come to grips
with non-compliance.
WHO IS A BUSINESS TRAVELLER (BT)?
� Employee who remains employed in home country
� Short stay(s) in visiting (host) country - normally
travels with visitor visa
� Provides services to the entities in both home and
host countries
Perspectives
INTELLIGENCE REPORT » Employee share plan trends30
Business Traveller’s — why is it so challenging?
Awareness of the complex BT rules and their application
is critical.
For example, BTs coming to Australia from countries without
a double tax agreement with Australia must apply for a
Tax File Number (TFN) via the Australian Taxation Office
(ATO) and then file an Australian tax return. In New York, an
employer will not be penalised for “failing to withhold New
York State tax on wages paid to a non-resident employee
who performs services both in and out of New York state
” for certain employees who work 14 days or less in New
York state (the “14-day rule”). However, this is typically only
applicable to wages. Compensation that relates to services
performed in a prior year (such as the majority of incentive
plans) is specifically listed as an exception to the 14-day rule.
Therefore, incentive plan participants will be liable to New
York State tax if they even work one day in New York State
and the Department of Taxation and Finance have enforced
that in practice.
The relatively long lifetime of incentive awards exacerbates
issues, especially when it is necessary to track employees
across multiple countries to comply with company tax
obligations.
Ensuring that a company has an effective policy for BTs will
require collaboration from tax, human resources/reward,
global mobility, finance and payroll. It therefore remains
important for the HR/reward team in an organisation to take
a role in the design and development of the business traveller
policy, especially as there will be unique rules that apply to
equity which need to be properly considered, but the wider
group will need to be involved in BT policy development.
A lack of a coherent set of rules or principles in regard to how
incentive awards should be taxed in the hands of BTs is likely
to lead to a wide range of interpretations within the company
and thus complexity.
Business Traveller’s — meeting the challenge
There is no one size fits all policy when it comes to BTs,
and the right solution for one company may be the wrong
solution for another. However, there are some points that
every company should consider when it comes to meeting
the challenge posed by BTs and, in particular, BTs holding
incentives.
First, having knowledge of the issues is essential.
Understanding and analysing the rules in the relevant
countries, as well as states and provinces within countries
such as the US and Canada, and the associated risks is vital
ahead of settling on a policy. It is also important to appreciate
what the company is already doing in respect of BTs and
cross-border employees more generally as this is likely to
inform the approach to take in respect of incentives. For
example, if the company is not currently compliant in respect
of visa requirements, this is likely to be a priority matter over
the tax treatment. Therefore any policy or change is likely
to have closing that particular compliance gap as its core
purpose.
Second, once the analysis has been completed, companies
need to decide upon an approach and, where relevant,
formulate a formal BT policy. The risk tolerance or appetite
within an organisation will drive this to a certain degree. A
simple risk based approach with a threshold number of days
(over which companies consider the taxation in all locations)
is the probably the most common in the Australian market.
Probably due to the increasing audit activity in the US, it
is more common to see companies in the US formulating
a policy that seeks higher compliance based on the rules
in each state/country. We expect a more detailed review of
applicable laws in forming a BT policy to become increasingly
common in other markets, including Australia.
INTELLIGENCE REPORT » Employee share plan trends 31
Perspectives
The third and final stage is to implement the approach and
policy agreed upon. Increasingly technology is playing a large
part in assisting companies with this as the amount of data
involved in monitoring and managing compliance can be
unmanageable without an automated system in place. In fact,
an increasing number of tax audits are requiring companies
to prove that they are tracking their BT population, this
has been seen in countries such as Canada, China, UK and
the US and the expectation is that will become even more
commonplace in those countries and others.
The rise of the contingent worker
In the same way we have seen the number of BTs rise
significantly in this decade, there is a new type of worker that
is growing in size and is likely to be an increasing concern for
incentive plan practitioners. This group of workers has been
dubbed as “contingent” or “transient” and include those
working in the gig economy and those working remotely
(possibly from another country). In the coming years we
expect that how companies manage the way the workforce is
changing to be a major theme in HR and tax.
As organisations evolve to include more contingent or
transient workers, the role of incentives will need to be
re-evaluated as they may not be an effective way to reward
or remunerate. It will be interesting to see how the role of
incentives evolves to cater for these contingent or transient
workers.
The taxation of incentives in the hands of these workers will
also be a serious challenge, especially as the individual may
be in a country in which the employer has no permanent
establishment. The work performed may even relate to a
project being undertaken in another country altogether. The
question then becomes in which country or countries their
incentives should be taxable. Physical presence, tax residence
and work days seem almost outdated concepts for contingent
or transient workers and it will be fascinating to see how tax
authorities react.
Richard Wilson
Senior Manager
Sandra Buth
Principal
Robert Basker
Partner
About Deloitte Global Equity & Rewards
Our Australian Global Equity & Rewards team is an integral part of the Deloitte Global Incentive Plan network, which is the largest dedicated specialist incentive plan network of any firm. Our purpose is to help organisations by empowering Equity and Reward professionals to fulfil their potential. We achieve this by:
Digitising the remuneration industry
Bringing our best to tomorrows companies
Managing global risk for today companies
About Deloitte
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In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au.
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© 2017 Deloitte Tax Services Pty Ltd
Perspectives
INTELLIGENCE REPORT » Employee share plan trends32
JB Were
Where to in 2018?
The world achieved synchronised growth for the first time
in a decade in 2017. All 45 countries in the OECD, along with
the major emerging economies, grew together this year.
Importantly, this momentum looks set to carry through to
2018. We are expecting global growth to remain in 2018.
Synchronised growth helps build business and consumer
confidence. Two important consequences for investors follow
on from this:
1. Earnings certainty — Momentum in 2018 provides a guide
into corporate earnings growth, which is in the 8-12%
range in the large markets. In addition the US also has the
wildcard of tax cuts, which could provide a further boost
to these numbers.
2. Reduced Recession risk — Recessions can be seen
coming. They are usually precipitated by a market crisis
such as the global financial crisis, but the requisite
problems take years to build up. These are largely,
although not absolutely, absent heading into 2018.
With synchronized growth, positive earnings, and low interest
rates, the path of least resistance is higher. This underpins
our judgment that investors should hold their full portfolio
quota of global equities into 2018. However by August this
year, this will be the longest post-war bull market for US
equities, which raises many questions for later in the year.
Whilst inflation may be of concern for later in the year, other
factors may provide potential surprises. We see little impact
of global politics on the direction of markets in 2018, but
there are three fault lines to watch closely - Trump’s tax cuts
and mid-term elections, Italian politics and Chinese reforms.
In Australia
The Australian economy continues to perform reasonably
well, supported by infrastructure and housing, construction
activity and stronger LNG exports. Business conditions
have been buoyant in 2017 assisting in non-mining business
investment and healthy employment growth.
Against the backdrop of strong business conditions and
employment, Australia has had surprisingly soft wages
growth and low inflation - reflecting similar conditions in
other developed market economies. Weak wage growth,
large increases in energy prices and higher mortgage rates
on some types of home loans has meant that Australian
consumers have tightened their belts in recent months, with
retail sales being particularly weak.
The Reserve Bank of Australia has indicated that it expects
its next policy change to be an interest rate rise. However,
given the uncertainty around the outlook for wage growth
and inflation, RBA Governor Philip Lowe has suggested that
the next move may not be for some time, and markets are
currently not pricing in a full rate rise until early 2019.
Portfolio Positioning
Australian Equities: Australia are trading cheaply
relative to global equities. The lack of growth within listed
shares has contributed to a valuation discount and to an
underperformance world markets during 2017.
If the Australian share market is to sustain its current
valuation, where will growth come from?
Resources: remains the swing factor in terms of forecast
levels of the Australian market. If resource stocks grow
earnings by 10% next year this only adds about 1.6% to
ASX market growth. Consensus forecasts expect resource
earnings to grow by 2% next year but implied earnings
upgrades from using the current spot price of major
commodities shows a potential increase of more than 30%
to the earnings per share growth of miners and 9% in for
energy stocks. The implied increase to earnings in 2019 is
even greater.
Banks: have a forecast growth rate of 2.7% next year but
come with the caveats of record low debt provisioning,
peaking (but not falling) house prices, increased competition
for investor loans, a looming Royal Commission, potentially
transformational IT projects to execute, a flat yield curve, and
the spectre of rising interest rates. In spite of this they are
trading cheaply and dividends would seem to be sustainable
albeit with no growth.
INTELLIGENCE REPORT » Employee share plan trends 33
Perspectives
Cyclical Industrials: are trading at full earnings multiples
compared to mid-cycle levels and, in any case do not have
the market weighting to lift overall market growth too much
higher. However, the market will continue to pay for growth
as we have entered a phase where technologically-superior
companies have the ability to optimise logistics chains and
dictate terms to suppliers and customers alike.
Defensive Industrials: offer a mixed bag with REITS offering
value but not much growth, infrastructure offering growth
but not value, healthcare is at historically high multiples
that are not justified by forecast earnings growth, and the
telecommunications sector is still coming to grips with the
NBN rollout.
In summary, the Australian market has the ability to grow
but is heavily dependent on resource sector earnings which,
in turn, are strongly correlated to the ongoing stability
and composition of Chinese GDP growth. In addition, bank
earnings are likely to be smooth but we anticipate the quality
of those earnings may deteriorate.
International Equities: We expect that current growth rates
can continue and support valuations. Although US shares
are trading at a premium to other international markets,
we expect that they can continue to generate acceptable
returns in the short to medium term, particularly if the
proposed tax cuts are enacted in the next few months and
corporate earnings reports for calendar 2017 are in line with
expectations. European and Japanese shares are cheaper
and provide greater exposure to cyclical improvements in the
global economy.
Currency: The Australian Dollar has continued to pull back
from its September highs of over US$0.80 helped by the
significant erosion of the yield premium that Australian bonds
had over US bonds. We believe that the US Dollar can move
higher pushing the Australian Dollar towards the mid-to-low
70 US cent level, particularly once official US interest rates
become higher than Australian interest rates in 2018.
Our default position is that international equity exposures
remain un-hedged due to the diversification benefits that
currency exposures provide. However, if we see short term
reasons for the currency to move higher we will suggest
hedged currency exposures and, at present we don’t see
short term catalysts for the Australian Dollar to move higher,
so we recommend that clients remain currency un- hedged as
we move into 2018.
Richard Sinclair
Director
JBWere
JBWere
JBWere has a proud and distinguished history of building long enduring relationships and providing pre-eminent wealth advice to our clients since 1840. The firm has an entrenched culture of always putting the interests of the client first and achieving successful investment outcomes for them, which has been a critical factor in our unique longevity for these past 177 years.
The strength and stability of JBWere is underpinned by our ownership structure and strategic alliances. We are owned by National Australia Bank and supported by investment research from UBS and Moelis & Company. This enables us to draw on the resources of one of Australia’s largest banks in addition to world-class global investment and research capabilities. Importantly, we maintain an open architecture approach to investing, which means we recommend the most appropriate strategies, investments and products based individual circumstances and needs.
Executive Summary
About Computershare Limited (CPU)
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