by Houria Williams, Senior Manager, International HR Consultancy Solutions and Watson Wat, Senior Manager, Global Solutions at TMF Group
As the world economy emerges from the pandemic, there is a huge uptick in hiring. But with the global skills gap seemingly bigger than ever, it’s a candidates’ market. One proven way employers can attract and retain the best talent – without damaging cash flow – is to offer an employee equity plan. But how can companies maximise the benefits to their key employees, while staying fully compliant with the ever-changing regulations around such plans?
Big hire, or great resignation?
With the end of the pandemic in sight, at least in the world’s more developed economies, we’re seeing a rapid return to economic growth driven by high vaccination rates and fiscal stimuli. According to recent projections from the Organisation for Economic Co-operation and Development (OECD), global economic growth, while patchy, is now expected to be 5.8% for 2021 – significantly higher than its December 2020 projection of 4.2%.
Such renewed levels of economic activity spell one thing: a hiring boom, as companies look to fill vacancies, many of which were created during the tough times of 2020. Research from the recruitment firm Monster finds that 82% of employers plan on hiring in 2021, with 37% planning to backfill jobs lost during the pandemic, and 35% planning to hire for net new jobs.
The flip side of this ‘Big Hire’ is what some economists are calling the ‘Great Resignation’. People now seem more prepared to move on if they feel they are undervalued or are not treated well by their employers. And it is very much a candidates’ market, with skills shortages more of a concern for recruiters now than before the pandemic. Monster’s research also found that 80% of employers are having more difficulty filling openings because of skills gaps compared with a year ago.
So, what steps can employers take to attract, and retain, the best people in this challenging recruitment environment?
Rewarding employees… without the cash drain
Pay rises are a hot topic among employers as they look for ways to retain their best talent, and many companies are planning base salary increases over the coming months. One notable recent example is BlackRock, which is planning to bump all employees’ base salaries up by eight percent in September 2021.
A less immediately costly way companies can stand out from the crowd in a buoyant market is to reward their key employees with equity as part of their compensation package. This is a proven way for employers to boost their strategy to attract and retain the best talent, while simultaneously protecting cash flow.
Employee equity plans enable companies to offer shares to their employees at all levels, in addition to their standard salary and benefits. They are already commonplace in the tech industry, notably among start-ups and fast-growing companies keen to hang on to their most valuable early team members and core developers, for example.
Now, more established companies are turning to equity compensation plans as a way of retaining and incentivising high-performing employees, those in leadership positions, and those with critical roles within the organisation.
Done properly, equity compensation can work to align employees’ interests with those of the company with minimal cash outlay (unlike cash bonuses, for example). Because payments are made to employees only when the equity vests, after a specified period, they incentivise employees to remain with the company for the financial reward.
Employee equity plans at a glance
Essentially, equity compensation is non-cash pay that is offered by companies to employees in the form of stock options, restricted stock units or performance shares.
Equity compensation enables employees to share in the company’s financial success through appreciation and can encourage retention through vesting requirements (shares issued to employees are usually subject to a vesting period before they are earned and can be sold).
The most common types of equity compensation used by companies include:
The importance of getting it right
There are significant benefits to employee equity plans, but there are also a few potential pitfalls to be avoided. Such schemes are governed by a multitude of rules and regulations, and the compliance requirements in different jurisdictions can vary widely, making schemes complex to manage for international organisations.
One example of such complexity is when employees move between countries during the vesting period. This increases reporting requirements, as the company bears additional reporting obligations based on the footprints of its employees. It is essential to keep accurate records of employees’ movements across the entire vesting period.
Another consideration relates to withholding tax treatment in different countries. Generally, the plan administrator calculates withholding tax when employees sell shares, and routes the funds back to the company. In some countries, the withholding rate is higher for equity compensation than for cash compensation, and it is important to calculate the withholding rate and sell-to-cover ratio for the fund administrator to execute.
In certain jurisdictions, registration of equity compensation is required, and there may be additional tax treatment needed according to the equity compensation structure chosen.
Complexities such as these make it vital to plan carefully ahead of implementation, ensuring the right scheme is in place for the particular needs of the company and its employees, as well as robust reporting and regulatory compliance processes that are in put place for the long term.
Establishing and handling the often-complicated administration processes around equity compensation requires specific expertise. With plans typically lasting for three to five years, rigorous equity tracking and calculation of reward need to be in place over the whole lifetime of the scheme.
About the authors
Watson Wat joined TMF Group in February 2020, as Senior Manager, Consultancy Solutions Senior Manager, located in Hong Kong. Supporting clients with HR solutioning, involving payroll projects, setting-up HR processes, APAC and US country expansion HR advisory and HR compliance. Previously, Tax Manager in KPMG providing solutions on income tax compliance and advisory for global mobility, equity compensation compliance and tax process transformation for 10 years.
Houria Williams joined TMF Group in January 2020, as Senior Manager, International HR, located in UK. Supporting clients with M&A carve-out, HR Integration, involving payroll projects, setting-up HR processes, benefits, onboarding and engaging employees. Previously worked as a Director of HR Transformation and Management Consulting and an Associate Partner at an international consulting firm, leading the Workforce Management practice and assisting clients on global HR & business transformation, change management, organizational & HR processes redesign, Human Capital Management.
This article was first published on the TMF Group website