Issues Related to Global Executive Plans

Siobhan Hurley, PricewaterhouseCoopers LLP

Steve Brown, Accenture

5 November 2001, NCEO Global Equity Compensation Forum

Case Study

Design and Implementation of Share Plans at Accenture

Agenda

• General background on Accenture and how Company determined its equity compensation philosophy

• Discussion of country specific issues that Accenture faced as a result of equity compensation philosophy

• Key regulatory issues that Accenture faced and how resolved

Accenture Background

• Large multi-national company was implementing equity plans for the first time in conjunction with IPO

• Change in corporate structure generated a need for new compensation structure -- Transitioning from partnership to corporation

• Highly mobile global workforce– Operating in 46 countries– 75,000 employees; 2,500 partners

• IPO put a tight deadline on implementation

• 2 key and distinct groups to satisfy: Executives (i.e.“partners”) and employees– The Plans needed to offer maximum flexibility to satisfy both groups

Accenture Share Plans

• 3 Plans Implemented:

– Stock Option Plan

– Employee Stock Purchase Plan

– Restricted Share Units (RSU’s)

– Promise to deliver Accenture shares at no cost to employee at a

specified future date

– No voting or dividend rights until shares delivered

Accenture Objectives

• Implement all plans in all countries wherever legally possible

• Encourage long-term ownership for partners

• Celebrate the IPO and encourage ownership by employees

• Flexibility to make plans attractive to executives as well as broader

employee base

Accenture Plan Design

Stock Options:

– Stock option grants limited to managers and above

– One-time grants at IPO

– Possibility of future grants upon promotion or being hired

– Significant future grants anticipated upon promotion to “partner”

ESPP:

– ESPP designed to offer broad, ongoing participation to employees

– Excludes partners

Restricted Share Units: (RSU’s):

– Generally one-time celebratory grants at IPO

– Designed to offer broad participation (Provided to all employees)

– Also provided to key executives (I.e. newly promoted, high performing partners)

Accenture Plan Design

Key Distinctions between Executives (“partners”) and employees:

• Options:

– 4 year vesting for employees

– 5 year vesting for partners

• RSU’s:

– 100% vested for employees at IPO

– Share delivery at 18 and 36 months from IPO for employees

– Generally 5 year vesting for partners with Share deliver spread over 8 years

Plan Implementation

• Now that decision of which plans to offer and to whom had been made, Accenture needed to make this happen globally

• Objective of providing flexibility and satisfying different groups necessitated creativity in some jurisdictions

• Other jurisdictions posed regulatory problems

Netherlands – Stock Options

• Traditionally, tax is due at vesting of stock options

• Recent legislation allows employees to choose to defer taxation until exercise

• However, social tax is still due at vesting and possibility of any deemed discount to be taxed at vesting; corporate deduction can also be an issue

• Some companies are seeking rulings to allow only full cashless exercise;

• With ruling, Dutch tax authorities treat award as cash compensation, not under stock option rules; entire spread is taxed at exercise

• Problem: reconciling desire of some employees to hold shares with administrative issues

Netherlands – Solution for Stock Options

• Decision: Offer employees a choice of Stock Option grants

Alternative A: Standard grant with income and social tax at vesting

•Chosen by 3 of 18 partners who received options

•Chosen by 29 of 243 employees

Alternative B: Standard grant with choice under new rules to defer income tax until exercise

No employees or partners chose this alternative

Alternative C: Grant that allows for full cashless exercise only; all taxes now due at exercise/sale

•Chosen by 15 of 18 partners who received options

•Chosen by 214 of 243 employees

Netherlands – RSU’s

• RSUs would be taxed at time of RSU grant (generally IPO date), as they are fully vested at grant, rather than at receipt of actual shares

• Broad-based nature of RSUs - tax at grant could make the awards a burden for the employees rather than something positive

• Failure to present alternatives to employees could create problems with Works Council

• Company wanted to make certain they could achieve their aim of allowing all employees to participate in IPO but keep the grant as flexible as possible

Netherlands – Solution for RSU’s

• Decision: Offer employees a choice of RSU grants

Alternative A: Taxed at time of grant of RSU on FMV of shares with a discount factor

•Chosen by 0 partners

•Chosen by 250 of 838 employees

Alternative B: Tax at time shares are delivered based on FMV on date of delivery. Requires vesting conditions and ability to convert shares to cash.

•Chosen by 3 of 3 partners who received RSU’s

•Chosen by 588 of 838 employees

Switzerland

• Generally, tax is due at grant

• Taxation can be shifted to exercise if certain conditions are met:– Option life is greater than 10 years– Vesting period is greater than 5 years– Option cannot be objectively valued at grant

Switzerland -- Solution

• 2 plans offered -- employees have choice

• Standard grant with 10 year life -- tax at grant

• Amended grant with 10 year + 1 month life -- tax at exercise

• Employees choose before grant

• Allows employees with funds and ability to take risk the opportunity to pay tax at grant– One of 8 partners and 5 of 95 employees who received options chose tax

at grant

Japan

• Securities filing requirements are complex and can be time consuming

• Number and value of anticipated option grants upon IPO meant full securities filing (Form 7) would be necessary

• Time involved in preparing and translating audited financial statements meant it was unlikely filing would be completed prior to IPO

• Accenture was faced with the possibility that if grants may not be able to take advantage of IPO price

Japan -- Solution

• Establish a trust to which the options are granted—Ninni Kumiai (the NK)

• Company grants options to the NK indicating optionee’s name and number of options

• NK is viewed as single holder of options – full Form 7 not necessary

• When NK is dissolved, options are distributed to optionees under original terms and conditions

Regulatory Issues Faced by Accenture

• Primarily exchange control issues, although securities regulations also were a factor

• Post IPO implementation of ESPP meant more time to complete exchange control filings; not the case for securities filing in Japan

• Accenture been successful in offering ESPP in “unusual” locations—Brazil, India, South Africa

• Looking at possibilities for China and Russia

China

• Lack of regulations and responsible authority on stock plans means there are numerous discrepancies on what is permissible

• Exchange controls are strict; previously thought to include ownership of foreign shares

• Currently, it is believed ownership of shares is OK, but still difficult to remit funds

• Accenture decided to proceed with implementation of options and RSUs; employees generally must do a sell to cover or cashless exercise

• ESPP– Cash-based alternatives available

India

• Exchange control restrictions -- annual remittances greater than $20,000 require Reserve Bank of India (RBI) approval

• All plans were extended to employees, but local entity must monitor compliance with $20,000 limit for ESPP

• Generally, sell to cover and cashless exercise are necessary for options

• In order to secure most favorable tax treatment, a change to the RSU plan was necessary– RSU recipients must pay a nominal purchase price when they

receive the shares

India New Guidelines

• Exchange controls were not the only difficulty faced in India

• Confusing guidelines published by the Securities and Exchange Board of India (SEBI) meant taxation of plans was unclear

• Conflicting information made full implementation difficult—plans were rolled out, but caveated that tax treatment could change

• New Central Government guidelines published October 5, 2001

• Clarified that plans of foreign parent companies are eligible for preferential tax treatment (tax at sale) – retroactive to April 2000

Brazil

• Exchange controls make implementation difficult

• Remittance abroad of more than $20,000 per year requires Central Bank of Brazil (CBB) approval

• Company can make remittances on behalf of employees below that amount, but must report details to the CBB

• Funds remitted by employees for ESPP are tracked and monitored by the company to ensure that $20,000 annual limit is not exceeded

South Africa

• Exchange control restrictions make stock plans difficult to implement

• Accenture opted to file for exchange control approval in order to extend stock plans to the fullest extent possible

• Employees can participate in all 3 Accenture plans

• Any remittance of funds as part of participation counts against employees lifetime investment allowance of RND 750,000

• All exercise methods available (exercise and hold, sell to cover, full same-day-sale) as long as investment allowance is respected

Closing Comments and Questions

• Strategy is important for global plans – need to understand what the company’s objectives are in order to make the best decisions when faced with country specific challenges

• Companies may need to offer choices in some countries in order to provide the flexibility to satisfy both executives and broader employee population

• There are alternatives and solutions for problems with exchange controls and securities filings