Granting stock options to employees based around the globe

Granting stock options to employees based around the globe brings with it a need for thought and care.

While the international element may bring greater complexity, the ultimate objective is the same as in any other equity award scenario, to facilitate a potential win-win for employer and employee alike.

Why stock options are attractive?

From the company perspective, this means using awards as a means of ideally creating greater loyalty, deeper engagement, and improved performance among the workforce, while also acting as a tool to impact positively on recruitment and retention.

For the employee, the hope is they will make a profit when purchasing and then selling stock down the line, while the positive outcomes the employer hopes to see can happen in parallel, as the employee becomes more actively invested in seeing the company prosper.

How do stock options work?

Put simply, when an employee receives stock options, they enter into a contract whereby they are given the right to buy stock at a specific price – the ‘exercise price.’ Once the vesting period elapses (options usually vest gradually over a multi-year timeframe), they are then free to purchase that stock.

Ideally, the stock price will have risen during the intervening period, with the difference between the exercise price and market price at the time of purchase essentially representing profit to the employee.

Different types of options for a global workforce

As with any equity-based incentive, thought should be given to what the most effective type of award may be before committing to a course of action. The point here is that there are different types of stock options, and not all will necessarily prove ideal when making awards to employees based in other jurisdictions.

Incentive stock options (ISOs): ISOs can be an attractive prospect for employees based in the US, with their structure seeing them qualify for favorable treatment under tax law, as long as certain conditions are met, e.g., if an employee holds their shares for more than one year after purchase and at least two years on from the initial award, they will pay long-term capital gains tax when they sell, as opposed to facing a higher bill if selling sooner and becoming subject to short-term capital gains.

However, this perk does not apply for stock options issued to employees based outside the US, as they will be subject to the tax laws of wherever they are resident, as opposed to the US code.

Also, ISOs can only be awarded to employees, i.e., independent contractors are not eligible. So, unless your target population is 100% made up of formal employees you will need to look at another alternative.

Non-qualified stock options (NSOs): NSOs tend to be marginally less attractive to US-based employees, but they may be more appropriate when considering your international operation.

NSOs receive no special tax treatment and therefore tend to be dealt with similarly around the world. More often than not, this will see recipients face ordinary income tax bills (with the rate varying depending upon the country) at two distinct moments: first, when options are exercised, and then whenever the employee goes on to sell those shares.

Another difference between ISOs and NSOs is that when using the latter companies can spread the net wider in terms of who is included. While ISOs are only available to employees, NSOs can also be granted to various types of non-employee, e.g., contractors, consultants, and advisors.

Practical considerations when dealing with multiple jurisdictions

Beyond the ISO vs NSO question, there are a number of other points to be borne in mind when a business is looking to grant stock options to personnel located around the globe. To make the most of any proposed plan, you need to consider where your employees are based, how local legislation views options awards, and also the likely tax implications. These laws and rules can and will vary from country to country (e.g., in some countries a tax bill will become due at issuance, while in others this is not the case) and you must inform yourself on the state of play wherever you have people you hope to incentivize with stock options.

With regard to taxation, the concerns are twofold – not only the obligations of the employee, but also those of the employer, i.e., there may be tax withholding requirements, and failing to abide by local rules can lead to expensive penalties.

Also, it is important to make clear that we at Global Shares, a JP Morgan company, do not offer tax advice. The above does not constitute tax advice, but we do recommend that you seek the necessary advice out, i.e., the tax situation in whatever countries the people to whom you want to grant options are based.

How to go about awarding stock options to global employees

US-based companies looking to award stock options to employees in other countries will often times work with a professional employer organization (PEO). A PEO provides services (e.g., HR and payroll functions), but the company issuing options remains the employer of the relevant individuals. The logic is that when expanding overseas a PEO – based in the relevant country – will hire employees on behalf of the company based elsewhere.

Sometimes this arrangement will permit the awarding of stock options from the parent company to individuals hired in another jurisdiction by a PEO. However, as stated previously, this isn’t a one-size-fits-all situation, and so issuing options through a PEO may not always be permitted. In those circumstances, it is not uncommon for companies to set up a subsidiary in the relevant country to act as the formal employer, and thus facilitate the issuing of options, while the PEO continues to perform whatever tasks have been assigned to it.

Again, remember, if you set up a subsidiary, that may also have tax implications for the parent company, depending upon where you do so.

The points referred to above are merely some of the issues that need to be considered, with specific details on how the process might play out in particular countries beyond the scope of this article. If your company has employees based in other jurisdictions around the globe and you want to explore the possibilities around awarding options to them, contact Global Shares, a JP Morgan company, today and speak with our experienced industry professionals.