Q&A with Equity Plans Experts

Get direct guidance from our equity plans experts on recent industry developments, best practices, and more. In this issue, we cover:

• Foreign currency management for ESPP contributions
• Restricted stock replacing performance awards
• ESPP open enrollment during a pandemic
• Reconciling share plan balances and share usage
• ESPPs with TFSA components
• A lesson in liquidity

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Foreign currency management for ESPP contributions (where shares are not acquired on a payroll cycle basis)

We are looking for ways to minimize the impact of foreign currency fluctuations on participant contributions under our global ESPP. How do other companies do this for their participants?

The ability to participate in a company’s Employee Share Purchase Plan (ESPP) program provides many opportunities for employees. But those opportunities come with some risks, including exposure to foreign currency fluctuations.

Like travelling abroad, sometimes your Canadian dollar buys more and the goods you purchase seem inexpensive; sometimes the opposite is true. This is because of fluctuations in the strength of the dollar compared to the currency of the country where you are purchasing goods or making investments. In the context of share plans, these types of currency differences are sometimes favourable to participants and sometimes not – but they are always a source of uncertainty, particularly for ESPP programs.

By and large, most companies use the following method as it is easy to administer. Contributions are deducted in the local currency throughout the purchase period and then converted to the plan currency on the purchase date. This means that employees bear the risk of any currency fluctuation over the purchase period.

Other methods, like converting contributions each pay period, monthly or using a spot rate, can significantly help mitigate issues with market fluctuations. These methods aren’t as administratively friendly but can be more favorable to the participant. Whatever practice you choose, it should be balanced between participant and administrator and it should be widely understood by all.

Find out more about this topic during Computershare’s session, Foreign Currency Management for Stock Plans, at GEO’s 21st Annual Virtual Conference on October 8th or on demand afterwards where our own Jessica Laddon, Computershare Senior Relationship Manager, will lead a best practice sharing session with panelists from three large global companies!

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Restricted stock replacing performance awards

Are you seeing companies issue a greater portion of time-based restricted stock under their executive pay programs (or in lieu of granting performance awards) given that it’s nearly impossible to set performance conditions in this environment?

Two companies in the UK, BT and Burberry, recently announced they switched from issuing performance shares under their executive incentive pay programs to issuing smaller grants of restricted stock with longer vesting periods. This was done for various reasons, including difficulties in setting long-term performance goals in a COVID-19 world. Both companies received strong shareholder support for the changes, but both companies also engaged shareholders very early and made strong cases linking their overall strategy to the rewards program. For additional information on this topic, please see the alert, Restricted Stock Gaining Momentum, from our friends and colleagues at Tapestry Compliance.

A broader market practice of replacing traditional performance plans with time-based restricted share plans would be a major shift in executive pay practices and does have interesting merits, e.g., reduces the complexity in executive pay plans that are often criticized as confusing and complex. That said, most institutional shareholders like to see a performance-based element to the executive pay mix and will likely continue to call for this. We are, however, seeing companies re-visit long-term incentive alternatives in preparation for the upcoming policy review season given the need for creativity in goal setting that doesn’t involve conventional practices predicated on growth and a reasonable market consensus view of performance. 2020 is every executive compensation trend watcher’s dream!

For more on how Computershare can help support executive pay plans, please visit www.computershare.com/employeeshareplans.

ESPP Open Enrollment During a Pandemic

ESPP open enrollment during a pandemic (as opposed to periodic enrollment windows)

Not only can ESPP programs be complicated, some plans only allow eligible participants to enroll in quarterly or semi-annual enrollment windows. So, the only time many employees are thinking about them is during these infrequent periods – during open enrollment. With a pandemic in the mix, employers are facing even bigger challenges related to communicating this benefit information.

Here are some quick tips to improve your ESPP open enrollment communications in a pandemic:

• Embrace online enrollment. A major perk when choosing to use online enrollment is that your system is linked to your administrators where open enrollment call centres are more fully equipped to help employers and employees during a pandemic. Further, the need for any paper processes is eliminated.
• Make greater use of your company portal or use a microsite. In the past, many companies have relied on employees being in the workplace to distribute program information. We suggest providing these open enrollment guides and program notices on your company portal or microsite in place of distributing paper copies to employees or displaying posters in the workplace.
• Go virtual. Many employers rely on in-person enrollment seminars, lunch-and-learns or benefit fairs to deliver information. Consider conducting virtual benefits seminars on WebEx or Zoom. Employees can meet virtually to watch slideshow presentations explaining the ESPP program and enrollment process and get an opportunity to ask questions of the HR team through the technology chat functionality.

If Computershare administers your ESPP, we offer several solutions to help support and streamline ESPP enrollment, including the above discussed online open enrollment. We also offer fully customized solutions that have proven successful for many of our clients. Talk to your relationship manager to learn more.

And if you are not a Computershare client, maybe should be! Computershare is a full-service provider of administration services for plans of all types, including ESPPs. Visit us at www.computershare.com/employeeshareplans to learn more.

Reconciling award plan share balances and share usage (where shares are sourced from treasury)

How often do you recommend reconciling share plan balances and share usage (common stock outstanding, options and awards outstanding, shares available for grant under our award plans, shares authorized but unissued, and treasury shares)?

If you are a public company, you need to periodically report share usage. However, all companies should reconcile share usage in their award plans on a monthly basis. This reconciliation confirms the number of shares of common stock outstanding, options and awards outstanding, shares available for grant under your share plans, shares authorized but unissued, and treasury shares. In doing this, you confirm that the transactions, grants, and cancellations for the period are correct. Reconciling your share usage monthly makes your quarterly reconciliation and reporting easier and helps you identify discrepancies sooner.

Your finance team should also conduct a monthly reconciliation. If your award plan share usage is not correct, then it is likely that your financial reporting reconciliation will also be incorrect. Your award plan share usage impacts your company’s payroll reporting, financial reporting, proxy statements, and compensation analysis. Taking the time each month to make sure that your grants, transactions, cancellations, and issuances are correct provides the foundation necessary for accurate reporting.

Computershare offers a fully integrated financial reporting tool as part of its plan administration services. All reports are US-GAAP and IFRS compliant, and each number on every report is fully auditable. Learn more at www.computershare.com/employeeshareplans.

ESPPs with TFSA components

Special thanks to Ritu Gupta, Computershare Client Relationship Manager, for her contribution to the response to this question.

What should we consider when adding a Group Tax-Free Savings Account (TFSA) to our Employee Share Purchase Plan (ESPP)?

To add the TFSA to your ESPP, you would first need to update your plan text to include the option for employees to elect to contribute to a TFSA instead of, or in addition to, the taxable account. If your plan does not have vesting requirements on the employer match, then both the employee contributions and the employer match can be directed by the employee to the TFSA. However, since forfeitures are not allowed from a TFSA, if your plan currently has vesting requirements on the employer match, then the employer match would first be deposited to the taxable account. Once vested, then those shares from employer match can be moved to a TFSA by the holder.

The other milestones to complete are:

• Registering the declaration of trust with Canada Revenue Agency (CRA) and obtaining a specimen number for the Group TFSA. Computershare has pre-approved template for this that we can review with you to ensure that it is in line with your plan text. Computershare will submit this for approval by CRA and obtain the specimen number for the setup of the Group TFSA.
• Updating electronic file interfaces between payroll and Computershare to ensure that contributions intended for the TFSA are properly identified. Computershare will provide the required information to help complete this successfully. Test site will be used to ensure file exchanges work smoothly.
• Employee communication is key to a successful launch. Computershare has sample announcement templates and Q&A type of communications that can be customized for your launch. We can also provide employee webinars to raise awareness for your ESPP and newly launched TFSA.

A lesson in liquidity (for clients with U.S. employee populations)

We’ve seen an uptick in 401(k) loans this year (for obvious reasons) and think we have an opportunity to do some training on other ways employees might get access to funds, including their ESPP shares. I’m just looking for some general comments on the topic. What a year!

As a long-time ESPP participant myself and firm believer in these programs, I advocate that participants have a strategy (formal or informal) to unlock the value of their ESPP earnings. This might include simply having a plan for how the earnings will be used, e.g., solely for retirement or in the shorter term to purchase a home, pay off debt or cover an unexpected job loss, to something more multifaceted like maximizing the tax benefit (where appropriate) and diversifying the proceeds thereafter.

ESPPs offer a low risk opportunity with one of the most attractive benefits being that shares purchased under the plan are highly liquid (can be quickly converted to cash for immediate cash needs) and can generally be accessed with little or no penalty, unlike a 401(k). Selling too early may have unfavourable tax consequences depending on the plan type offered. Nonetheless, liquidity means participants can get more creative with their earnings and use them for more immediate needs outside of saving for retirement. This can be particularly useful in times like these where having access to emergency funds may be important and serve as an immediate financial comfort.

For more on this topic, check out our recent webinar, Integrating Financial Wellness into Your Total Rewards, which explores what companies are doing today to address financial well-being through their compensation and benefit offerings. Based on results from the financial well-being survey undertaken by WorldatWork and Computershare, discover what measures your fellow Total Rewards professionals are taking to implement effective wellness programs that engage employees, how ROI is measured on these benefits, and the innovative things companies are doing to help with poor financial literacy.

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