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“Wait… What?” Myth-busting equity compensation misconception

busted-equity-comp-myths

Whether it’s promoting your company’s stock-based compensation plan, looking to get buy-in from staff on a new or existing offering, or simply seeking to learn more about equity based rewards in general, accuracy is essential.

People may have preconceptions about what equity compensation entails and how it works. These could be based on their own experience with previous employers, or even from second-hand information picked up from friends and family, with no guarantees that it is correct or relevant to your company’s plan.

Myths and Facts

Combatting ambiguity and misinformation is key, which is why open communications and education should form an integral part of any equity-based compensation strategy – not only at the beginning when implementing the offering, but right through the life of the plan. Knowing where you can find experienced, professional help is also important. So, with this in mind let’s set the record straight about a few of those myths and address some of the most frequently asked questions on equity compensation.

Myth:

Employee equity compensation rewards can only be offered by start-ups.

Busted.

Whether you’re a bright, new start-up eager to onboard quality staff but don’t have the ability to pay competitive wages, a publicly traded global giant seeking to motivate and maintain top talent, or a company anywhere in-between, there is an equity compensation offering that’s right for you and your employees. Whether private or public, local or global, equity compensation is a proven, popular way to attract, reward and retain staff.

Myth:

Employee equity compensation plans are only for tech-style companies.

Busted.

From bakeries to those in the auto industry, and from hip fintechs to well established drinks manufacturers – companies of all industries, both private and public, who are looking to motivate and reward their employees can usually implement some form of equity compensation, whether that’s stock optionsrestricted stock unitsperformance shares or other non-cash incentives.

Myth:

If I leave without waiting for my shares to vest I lose everything.

Busted.

Not necessarily true, however there can often be restrictions in place for leavers and it will depend on the Terms and Conditions set out in your company’s particular plan. There may be caveats relating to holding periods, vesting and so on. Typically, since stocks normally vest in tranches, you may be entitled to the portion of your equity that has vested as of your departure date. Some companies may even allow staff to retain their shares after leaving, although if it is a private company leavers could find they are restricted to selling their shares back to the company rather than a third party, for example.

Myth:

Once a company has chosen an stock plan provider they can’t change or move to a new one.

Busted.

While it’s not an ideal situation to find yourself in not all relationships are meant to last. Needs change over time and unforeseen circumstances may arise. Maybe your company is transitioning through a liquidity event, going from fully private to public and your service provider can’t accommodate this, or possibly you’re expanding into new territories globally, which their system is unable to support.

Bonus mythbusters tip: If you find yourself in a position whereby your equity compensation plan provider is no longer the right fit then it’s usually possible to change, just remember when doing your due diligence before choosing a new provider, such as Global Shares, to make sure that they can handle a large scale transfer.

Myth:

You need to operate an individual equity compensation plan in each of the countries you have staff in, right?

Busted.

Wrong. Certain offerings, such as an All Employee Share Plan, allow for all of your employees, no matter where they are in the world to be managed in the one plan. So no, you don’t need to have a different plan in each territory globally, unless of course you want it that way.

Myth:

Equity compensation plans are only for top executives and for enhancing CEOs’ pay.

Busted.

These rewards are a way to incentivize staff to achieve specifics targets or goals. That’s why equity compensation can potentially be made available to staff at any layer of your business, regardless of their level or role. Equity compensation might, once upon a time, have been seen as restricted to C-Suite executives but it now can, and often is, used as a way for companies to attract, reward and retain talented employees regardless of their job role.

Myth:

Equity compensation is only available to new hires.

Busted.

Equity compensation is a way for companies to reward staff and encourage performance. While it can be used as an incentive to attract new employees, it can also serve as a motivator for existing staff, aligning their goals with the wider objectives of the business. It will depend on the company and what plan type they choose to implement, what their short and long-term goals or aims are, what type of performance or behavior they want to encourage, and also whether they consider it as a one-time grant or as part of a regular ongoing awards program.

Myth:

Equity compensation plans are only available to public companies, not private ones.

Busted.

Some of the largest companies in the world are privately owned, and many of these offer equity compensation awards to their employees.

Myth:

If I hold equity through a plan in a private company and I leave I can’t sell my shares.

Busted.

Not true, although it is usually less straightforward than with a public company. There are normally restrictions around how or to whom you can sell stock or shares in a private company, e.g. a clause that they cannot be sold to an outside third party without prior approval from the company or that when an employee is leaving they must sell the shares back to the company. It will be dependent on the individual plan’s Ts&Cs.

Myth:

If I die before my shares have vested then my dependants get nothing.

Answer:

Again it depends on the rules of the specific plan, but it normally amounts to what the employee had a right to before death. It’s always best to speak to your company’s HR or Rewards Department for the exact details and any conditions, as it can differ from plan to plan. It’s also worth noting that there may be tax due by the beneficiary on any payment, so you should seek professional advice

Myth:

I always have to file my own personal tax returns for any equity compensation plan that I’m a part of.

Busted.

Not always true. In certain countries employees are not required to file tax returns and all taxes due will be collected through payroll, but it’s best to check with your HR or Rewards Department for the details relating to your specific plan. This is good practice anyway, as you don’t want to get caught out and discover too late that you have a tax responsibility you weren’t aware of.

Myth:

When pricing shares a company can use the same FMV (Fair Market Value) globally.

Busted.

Unfortunately FMV is very much dependent on the location and plan type. Different countries can have their own definition of FMV, so you need to be aware of this. You should also be cognisant that some countries charge tax at vest while others tax at distribution, which can have repercussions for certain plan types, like RSUs where vest and distribution are disconnected.

Myth:

When I sell stock or shares they are always subject to capital gains/losses tax.

Busted.

This is totally dependent on location, since not all countries impose capital taxes. Some countries have a wealth tax, which may apply. You should always check the details of your specific plan in the Ts&Cs or raise a query with your HR/Rewards Team.

Myth:

Stock options can only be exercised after shares have vested.

Busted.

Public company options tend to only be exercised when vested, however in private companies plans can be permitted to ‘early exercise’, allowing employees to exercise unvested options, i.e. acquire restricted stocks.

Myth:

Equity compensation awards are guaranteed to generate wealth.

Busted.

Unfortunately there are no rock solid guarantees when it comes to equity compensation. Like any other investment they come with some degree of risk and, depending on the plan type, the value of the equity held can rise or fall depending on a range of factors, such as the performance of the

company and general market conditions. It’s also important to note that there may be restrictions around when employees can sell their equity, which may in turn have an impact on the final price.

How can we help?

When it comes to equity compensation there is nearly always going to be something you don’t know or aren’t clear about, which is why it’s important to have trusted help to hand for getting your FAQs answered. Get in touch with one of our experienced professionals to learn how we can assist with your equity compensation journey.

Please Note: This publication contains general information only and Global Shares is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. The Global Shares Academy is not a substitute for professional advice and should not be used as such. Global Shares does not assume any liability for reliance on the information provided herein.

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