Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief
Out-Law Guide | 11 Nov 2011 | 11:31 am | 6 min. read
The use of equity incentive arrangements is well recognised within the telecoms industry. Certainly within listed telecoms businesses, it would be unusual to come across a company that does not operate some form of share-based incentive – equity incentives being generally advocated as part of the remuneration package, aligning employees’ interests with shareholder interests. Accordingly, senior talent will normally receive awards under one or more executive/discretionary arrangements (plans giving the employer discretion as to which employees it chooses to reward) and may also participate in “all-employee” plans offered by the company to its wider employee base (see the end of the article for some examples of plans operated by telecoms businesses).
As well as motivating, retaining and (hopefully) rewarding key talent, the aim of an equity incentive plan should be for employees, wherever situated internationally within the business, to feel part of the group, supporting a “team” with a common identity. Executive awards will additionally normally be subject to appropriately structured performance targets, so as to provide reward to participants in circumstances considered acceptable to shareholders.
Achieving these diverse objectives is not a simple task and the success of a share plan will be determined by several factors, including careful design, effective communication and commitment at senior level to the plan. The rewards, as evidenced by academic research, being a strong connection between certain kinds of share plan and improvements in employee retention (and productivity).
Various matters require consideration when implementing an equity incentive plan, whether the plan is to operate in one country only or on a multinational basis. Corporate, securities and employment/labour laws of the relevant jurisdiction must be adhered to, as well as relevant regulatory requirements. The tax treatment of the structure, from both an employee and employer perspective, is likely to be influential. If it works commercially, a plan that will give participants of the relevant jurisdiction the benefit of lower rates of (often, capital) tax on benefits delivered under it and, likewise, that can offer a tax deduction to the employer company, will be the likely choice.
Local advisers can provide information on the relevant requirements and forms of equity incentives generally offered within their jurisdiction. For discretionary plans, the latter will typically include stock options (giving participants the right to acquire stock at a future time at the share price prevailing at the award date, normally subject to the employee remaining in employment for a specified period following the award date and sometimes also to the satisfaction of performance targets), free (often known as performance) stock awards (again giving future rights to acquire stock, conditional on continuing employment and satisfaction of performance targets, but for no cost) and other forms of restricted or deferred stock awards which may or may not be subject to performance conditions, as well as in circumstances where it is not appropriate, or possible, to deliver awards in actual stock, so-called “phantom” stock awards which, whilst the value of the award may be by reference to the company’s shares, deliver the reward in cash.
Multinational telecom businesses are likely to want to extend participation in their equity incentive arrangements to employees in various jurisdictions and consideration will need to be given as to how best this may be achieved. From a tax perspective, it may sometimes be possible to implement arrangements that provide similar benefits in alternative jurisdictions. For example, the UK tax-favoured company share option plan (CSOP) - and, for smaller companies, the enterprise management incentive (EMI) option plan – are both discretionary option plans similar in nature to the US (qualified) incentive stock option (ISO). Likewise, the UK tax-favoured all-employee sharesave or save as you earn (SAYE) option plan and the share incentive plan (SIP) provide benefits of a similar nature to the US tax-favoured employee stock purchase plan (ESPP).
A multinational group will need to decide the extent to which tax will influence its choice of incentives – including the extent to which plans will be structured so as to provide maximum tax efficiency for employees in the “home” jurisdiction. This approach, adopted by some global groups, may not accord with the objective of the plan being intended to make employees worldwide feel part of the same team!
Expanding a plan internationally will require compliance with local securities laws. US companies, not listed on an EU regulated market, offering equity participation into the UK and/or other members of the European Economic Area must be mindful of the European Prospectus Directive which may in certain circumstances require the issue of a prospectus in relation to the offer, although the circumstances in which this will impinge on equity incentive arrangements are fewer following recent extensions of exemptions applying to employee share incentives and will be even less as of 1 July 2012 by when a further employee share incentives exemption, of particular benefit to non-EU companies, will be implemented. UK and other overseas companies extending equity incentives to employees in the US must take account of both federal and state securities requirements: a business with employees in more than one state in the US may need to comply with different securities requirements in each state.
Beyond legal requirements, the importance of varying national culture, perceptions and business practice cannot be underestimated, both in relation to the form of share incentive that is offered in the relevant jurisdiction and in its communication to (potential) participants, to ensure that participants perceive the selected structure(s) as a valued element of their remuneration. Likewise, to avoid unintended consequences, the translation of any participant communication documents from the “home” into the local language should be checked with the local company before being issued – words can have more than one meaning!
A toughening regulatory environment, particularly for listed telecoms businesses, requires equity incentive arrangements which comply with best practice, increasingly incorporating provisions for deferral, claw-back and risk adjustment.
Having been instituted to prevent the reoccurrence of bad practice in the financial sector, these features are gradually becoming custom for equity incentive arrangements in other sectors, including telecoms. As a result, a proportion of annual bonus previously immediately paid out in cash, may now be deferred into stock, paid out two or three years later, subject to continued employment. Claw-back provisions are also increasingly built into the arrangements, giving discretion (usually for the remuneration committee of the relevant company) to forfeit part or all of the stock so deferred if, typically, evidence of misconduct or financial misstatement comes to light during the deferral period. Equally, performance conditions applying to share incentives are designed so as not to encourage inappropriate risk taking by executives who will benefit from designated company performance outcomes.
Set out below are summary examples of the share incentive arrangements offered by three global telecoms businesses.
During the year ended December 31, 2010, executives and employees of Nokia participated in two global stock option plans, four global performance share plans and four global restricted share plans. Applying a portfolio approach, and with the intention of building an "optimal and balanced combination of long-term equity-based incentives", managers and employees in higher job levels are granted both performance shares and stock options, helping recipients to focus "on long term financial performance as well as on share price appreciation, thus aligning recipients' interests with those of shareholders' and promoting the long-term financial success of the company".
BT's senior executive remuneration package is made up of four executive share plans, the BT Group Incentive Share Plan, the BT Group Deferred Bonus Plan, the BT Group Retention Share Plan and the BT Group Global Share Option Plan (all renewed at its 2011 AGM). BT also operates all-employee sharesave and share investment/stock purchase plans. Under the Deferred Bonus Plan, part of an executive director's bonus is deferred into shares, BT's remuneration committee considering that "awarding shares on a deferred basis acts as a retention measure and contributes to the alignment of management with the long-term interests of the shareholders". The shares vest and are transferred to the executive after three years, if he remains employed by the company. The shares, as for unvested awards under BT's executive share plans, are subject to clawback "in circumstances where the committee becomes aware of facts which would, in its discretion, justify such reduction".
AT&T operates stock options (exercise prices equal to the market value of AT&T stock at the grant date) and performance stock units (non-vested stock units, granted to key employees based on the stock price at the grant date and awarded in the form of AT&T common stock and cash at the end of a three-year period, subject to the achievement of performance conditions). It also operates all-employee savings plans, under which the company matches (in cash or AT&T stock) a specified percentage of participant contributions.
A version of this article was originally published by Global Telecoms Business
Out-Law Legal Update
Individuals advised to check whether they can still claim entrepreneurs' relief