Wednesday, May 23, 2007

Stock Option Plans: Sizing Grants by Country

Should foreign employees receive stock options? According to conventional startup compensation strategy, yes, so long as: (a) local securities laws permit,(b) there are no adverse tax implications for foreign employees (such as taxing employees at the date of grant), and (c) as a matter of local corporate culture, options are viewed as having value by foreign employees.

If these criteria are met, it used to be simple enough to simply issue options under the existing plan with the proviso that the foreign employees only exercised options in compliance with local securities law, and after any applicable taxes were withheld and remitted. But as startups extend operations to China, and elsewhere, the uncertain local regulatory environment made this approach more challenging.

In the result, may startups are now reconsidering their across-the-board approach to incentive compensation and reducing the size of option grants made to employees outside of North America. This is becoming a regular practice with respect to employees in Europe, where some countries require companies to make substantial payments into government pension plans. Should those employees receive the same sized option grant as their North American counterparts? Some boards view this as double dipping, and reduce grants accordingly. Others eliminate grants outside of North America altogether, instead offering foreign employees with a bonus plan.

The implications? A regular ESOP audit to assess the fit of your company's plan as operations expand is a good idea. Looking at overall compensation on a country by country basis never hurts, either. An option saved is...well, an option that's available for management refresher grants.

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