Local tax and legal regimes can complicate share schemes for multinational employers, says Sarah Coles.

Some international employers think of their share scheme as "global glue". Everything else in the benefits package is related to the local market in which the business operates and has been designed to compete with rivals' perks in that country. But a share scheme ties employees across the business, wherever they are based, to the share price of the holding company, reminding them they are part of something bigger and working towards a common goal.

However, putting together an international share scheme isn't just a cut-and-paste job, whether it is a UK firm trying to implement a scheme across the globe or a company that is headquartered overseas trying to introduce a scheme in its UK subsidiary. Marcus Peaker, chief executive of share scheme consultant Halliwell Consulting, warns: "There is a danger of assuming something that works in the UK will work elsewhere. There is a risk that your scheme design won't travel."

Tax breaks
So when companies pack up their share scheme for international travel, there are issues they need to address. The first is that other countries have different tax regimes, so tax breaks around share schemes abroad may not be the same as in the UK. Some countries may even have tax breaks linked to other factors that may impact on the scheme. Deborah Broom, business development manager at Capita Share Plan Services, says: "For example, in France there are tax breaks around life events such as buying a house or having a child, which can affect share plans."

Some countries may even have tax rules that hinder the operation of a scheme. Julie Richardson, head of employee share ownership for ifs Proshare, which supports the promotion of share schemes, says: "Some countries will tax you upfront on any discount on the options, even if you never see a gain."

Clearly, option schemes do not travel well to such locations. It is becoming increasingly important to get to grips with the tax rules of individual countries, because authorities are no longer prepared to turn a blind eye to transgressions. Peter Leach, director of scheme provider Killik Employee Share Services, says: "In the past, companies may have put it in the 'too difficult' drawer to ensure they are tax compliant everywhere, but now the various revenues are clamping down and want to ensure they are getting their slice of the pie."

Apart from taxation, there are other factors that can hinder the operation of share schemes, notably local laws. "In some countries, you cannot give employees shares because they are not allowed to hold shares in that way," says Richardson.

Even in countries where you can award shares, there could be problems with options because of securities legislation. Employers that want to replicate sharesave may hit legal problems. Broom explains: "There are some countries where you cannot have options, some where you cannot collect savings, and some where you cannot hold shares."

Then there are process issues. For example, an international sharesave scheme can never be risk-free in the same way as it is in the UK, because employees are saving in one currency and buying in another, so they are taking a gamble on exchange rates. There may also be issues with settlement times that mean the scheme is not equitable around the world.

Even if employers can get over these hurdles, they must consider whether it is worth it, because in some cases employees may not be impressed with a scheme. Sue Bartlett, senior executive pay consultant at Watson Wyatt, points out: "You have to understand the culture of wherever you plan to roll out a scheme, and the degree to which employees are likely to be enthusiastic about it. The US and the UK have a long history of share schemes, but employees in other countries don't, so it could be a misdirected benefit."

According to Peaker, in Germany there is likely to be far more enthusiasm for a bonus plan than for an all-employee share scheme. Employees in some locations may even need to be introduced to the idea of share ownership. "For example, in Romania you would first need to explain what a share is," he says.

If employers in the UK have been tasked by their overseas holding company to roll out a scheme here, they can at least assume that employees understand what a share is. However, many taxation and legal problems remain and are complicated by the workings of the European Union. If the parent company is from outside the EU, for example, it may have to go to the trouble of issuing a full prospectus. It may also find that, from a tax perspective, there is no equivalent match for a scheme that it may offer in its own country.

Bartlett says the closest match to tax-efficient schemes in the UK is the 423 plan, available in the US. "It operates like a share incentive plan (Sip), but with a six-month cycle. You make savings for six months and, at the end of that time, buy shares at either the beginning or end price, depending on which is lower," she says.

US parents have the choice of offering something similar in the UK, and accepting that employees will be taxed on the discount, or introducing a Sip instead.

Employers keen to offer a share scheme in each of their territories must consider whether it is better to roll out an umbrella scheme globally or try to implement plans that suit the tax and legal regimes of each country. If they go for the one-size-fits-all approach, some may, for example, opt to give all staff the same number of shares or offer buy one get one free, and not care whether it is done in a tax-efficient manner.

The drawback of the umbrella approach is that it will be more appreciated in some territories than others. Broom says: "In some places, you may get zero take-up because it may not be seen as a benefit. In some countries it may not be a benefit at all financially."

The alternative is to tailor the plan to suit the local environment, and find as close a fit as possible within the local tax structure. The problem is, this is expensive. It means researching the local market and identifying the best match. It also means finding solutions to problems. For example, if UK shares are hard to sell, the company may have to offer a facility to enable staff to do this.

Where shares cannot be legally held by staff, it may mean launching a phantom scheme in which notional shares are given a value based on the metrics of the business, and then revalued at the end of the period using the same measure. A cash bonus is then paid based on the difference. But Bartlett says: "Many employees are less keen on a phantom scheme than good, honest cash bonuses. If you can't use real shares, the notional value of a share becomes a bit fanciful."

Peaker adds: "There hasn't been a country yet where a method cannot be found to provide the benefits of a share scheme."

Whatever the type of scheme used, it will require clear and careful communication that answers potential questions from employees about how the scheme works and what they stand to gain. "The most effective approach is face to face, because it gives people an opportunity to ask questions," says Peaker.

Effective communication, including multi-language documentation, websites and a helpline, adds to the already heavy cost of running a global scheme. Employers must decide whether their "global glue" is worth the extra expense, complexity and manpower.

US employee share schemes

Outside the UK, the US has the biggest tradition of employee share plans.

Its most popular types of scheme are: An employee stock ownership plan (Esop) The company usually uses the plan to borrow money to buy its own shares, which has significant tax benefits for the firm, its employees, and the sellers. Employees gradually vest in their accounts and receive their benefits when they leave the company.

A stock option plan This grants employees the right to buy company shares at a specified price during a specified period.

An employee stock purchase plan (ESPP) This gives employees the chance to buy shares, usually through payroll deductions, over a three- to 27-month period. The price is usually discounted by up to 15%. Often, staff can choose to buy shares at a discount on the lower of the two prices taken at the beginning and the end of the period. Firms usually set up these plans as tax-efficient Section 423 plans.

A Section 401(k) plan This retirement plan is designed to provide the employee with a diversified portfolio of investments. Staff can choose several types of investment, and the company may make a matching contribution. Company shares may be an investment choice for employees and the means by which the company makes matching contributions.

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