INTELLIGENCE REPORT - Computershare Services...INTELLIGENCE REPORT » Employee share plan trends 9. Case studies. CASE STUDIES SOUTH32 — COMMUNICATING WITH CONFIDENCE — BEST PRACTICE

INTELLIGENCE REPORT

Employee share plan trends

MARCH 2018

CERTAINTY INGENUITY ADVANTAGE

INTELLIGENCE REPORT » Insights from Annual General Meetings held in 2017

The data contained in this report is based solely on Computershare’s client meetings

INTELLIGENCE REPORT » Employee share plan trends 1

INTELLIGENCE REPORT » Employee share plan trends2

Executive Summary

2Executive summary

Introduction goes here


Executive Summary

Welcome to the fourth edition of Computershare’s

Employee Share Plan Trends report, designed to

provide you with insights into the local and global

employee equity landscape.

Over the last 12 months, there has been little or no

variation for employee share plan activity across

Australia and New Zealand.

text

Name

Managing Director, CPM


4Data insights


Data Insights

DATA INSIGHTS

Trends in take-up for different employee share plan types

Over the last 12 months there has been little movement

in participation across the different types of employee

share plans.

Our data, shows there is a decrease in participation for share

plans that offer a matching component and a corresponding

increase that don’t offer a matching component. This

anomaly can be attributed to one of our key clients offering

a salary sacrifice plan with matching in 2016 (83% take-up in

2016) but removed the matching in 2017, still achieving a take-

up of 62% which resulted in an increase in the salary-sacrifice

no matching. On balance, take-up remains steady.

Figure 1:

This example continues to support the theory that where

organisations offer a matching plan, take up is much stronger

than not offering matching (London School of Economics

2014 survey)

Plan participant voting trends

Companies who use Computershare to administer their

employee equity plans have the unique opportunity to capture

insights into their employee’s voting intentions. This can help

companies to structure their internal communications and

voting channels to enhance meeting activity.

Our research indicates that there is a continued decline in

voting trends for plan participants dropping to 1.00% in 2017

from 2.1% in 2016. The trend over the last 3 years indicates

a growing decline, and potentially less engagement for plan

participants. This trend is consistent for retail investors, with

both attendance and voting at meetings continuing to decline

in 2017 which is consistently attributed to general shareholder

disengagement and apathy with the current AGM format.. For

further information regarding general AGM trends, please

visit….

With regards to issued capital voted, our research shows that

6.5% of issued capital held in employee trust plans received

voting instructions from plan participants, up slightly from

2016.

Figure 2: Percentage of issued capital voted comparison — Employee Plan Participants (EPP) vs all meetings

Figure 3: Percentage of shareholders who voted

comparison — EPP vs all meetings

2015 2016 2017

EPP All

54.1%

44.0%

6.5%6.1%7.1%

48.1%

Salary Sacrificewith matching

Salary Sacrificeno matching

Broadbasedexempt gift

GlobalContribution

(post-tax)FY17FY16FY15FY14FY13FY12

0%

20%

40%

60%

80%

100%

2015 2016 2017

EPP All

4.7%4.4%

1.0%

2.1%

3.2%

4.6%

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Data Insights


Computershare research proves benefits and shapes effective employee contribution plan design.

Can you empirically demonstrate your contribution plans

Return on Investment (ROI)?

Do you know your employees or the broader populations

preferred communications or enrolment method? With this

knowledge do you think crafting communications to suit

those methods could increase engagement?

The equity remuneration community traditionally has

struggled to answer these questions, making business cases

to setup a new plan, or keep one running light on evidence

for sponsors that increasingly demand to know just what they

are getting for their investment.

We’ve been working on the ability to answer these questions

and to enable our customers to benchmark their plan designs

and operating models, not just against local peers, but on a

global scale that is only available with Computershare’s client

base. What better place to start than testing our prototype

on ourselves, like you listed, and with employees either

throughout Australia and New Zealand, or spread around the

world.

Highlights of what we found were:

� Loyalty

In Australia, our average tenue for those who have participated in our contribution plan at least once was 9.69

year, compared to 5.69 years for employees who never have elected to join the plan. That’s a significant difference

and certainly backs up academic research that has suggested share ownership, in particular through employee

contributions leads to more loyal employees.

� Performance

Pleasingly we have proven existing academic hypothesis in relation to employee performance where someone

participates in an employee contribution plan, with Australian employee performance scores being higher on average

should employees have participated in the plan at least once.

� Enrolment method

We have established a framework for analysing participant enrolment method preferences and then to be able to

benchmark employee bases vs. their global peer companies (web and telephone in this market). Preliminary analysis

shows that our telephone enrolment service is three times more popular with women in Australia than with men.

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Data Insights

These findings, enable us to work with clients such as Marks

and Spencer in the UK around developing more effective

communications strategies that target specific employee

demographics and business lines for example, something our

Communications Consulting service is doing much more of in

Australia and New Zealand.

This market leading analysis shows that companies can

achieve measurable benefits through employee contribution

plans.

For companies looking to attract or incentivise talented

people, in a market where wage growth is subdued and

not showing signs of rebounding, this capability proves

scientifically that an effective employee contribution plan is

an important part of an overall remuneration strategy and

importantly delivers an ROI to employers.

We are currently moving into Phase 2 of this development

which involves further customer testing on a global scale

to further refine our methods. We will keep you updated in

respect to our progress through Client Connect as the year

unfolds.

James Marshall

Managing Director,

AU Plan Managers

Case studies


8Case studies South32’s share plan is a critical

contributor in attracting and retaining talent in the industry. The core values of Trust, Care, Togetherness and Excellence, were critical in the plan design and the ensuing communications program.


Case studies

CASE STUDIES

SOUTH32 — COMMUNICATING WITH CONFIDENCE — BEST PRACTICE APPROACH WHEN ENGAGING A DIVERSE WORKFORCEWhen South32 demerged from BHP in 2015, share scheme

participation by employees was extremely important.

South32 wanted to ensure a continued commitment to broad

based employee share ownership as they were embarking on

a new identity and ensuring all employees were aligned to

South32’s AllShare plan as opposed to BHP’s Share Plus Plan.

South32’s share plan is a critical contributor in attracting

and retaining talent in the industry. The core values of Trust,

Care, Togetherness and Excellence, were critical in the plan

design and the ensuing communications program.

Some of South32’s challenges included cultural, linguistic and

geographical. Communication is translated into four African

dialects, and the plan needed to reach employees in remote

mine sites globally.

The communications program needed to engage each

employee, as it was delivered across seven participating

countries, for employees from various cultural and

educational backgrounds. Furthermore, the program also

needed to deliver on:

� Educating employees in share ownership

� Ensuring it met local tax and legal requirements

� Engaging unions across the various countries

� Had the right call to action to enable easy participation

The program consisted of the following key elements:

� Engaging Computershare to prepare specific

communication for employee plan participants

— Information is made available to all employees either

in hard copy format or via Employee Online, especially

catering for those employees that are mobile during

the offer/vesting period

— Leveraging Computershare’s call centre, which

operates out of Australia, covering Australia,

Singapore and the UK; and South Africa, covering

South Africa, Mozambique and Brazil. Computershare

South Africa also offers a walk in service for eligible

employees to assist with any questions about the offer

communication

� Addressing tax and legal requirements across seven

participating countries — ensuring employee plan

participants had access to tax, offer and vesting

summaries tailored to each of their local tax and legal

regime

� Developing relevant promotional material taking into

account cultural and linguistic differences

— Translated into four local South African dialects; Latin

American Spanish for employees in Columbia and

Portuguese to cater for employees in Mozambique

Since 2015, the communications program has evolved yearly,

taking feedback from employees to optimise the program.

As a result of this program, the plan has seen year on year

participation grown from XXXX to XXXX

Case studies


CSL

Changing plan design to ……..

CSL focusses on rare and serious diseases and influenza

vaccines. They compete on the global stage as one of the

largest and fastest-growing protein-based biotechnology

businesses and a leading provider of in-licensed vaccines.

In 2016, CSL received a first strike from its shareholders

rejecting its remuneration report due to investor concern

over rising executive pay. In 2017, CSL avoided a second

strike against its remuneration report after simplifying the

structure of executive remuneration and incentives.

CSL’s Global Employee Share plan forms a significant

contribution to how executives at CSL are remunerated.

Computershare has been providing plan management

services to CSL for over 15 years including managing their

Global Employee Share Plan in over 30 countries and their

Performance Rights Plan which is offered to their most senior

leaders.

As a consequence of receiving the first strike in 2016, CSL

decided to change their plan by introducing two new rights

plans for their executives. The previous plans included a

cash based phantom plan and CSL were keen to offer equity,

rather than cash to incentivise their executives. This is in line

with ………………………………...

To support CSL in the new plan design, Computershare was

involved in a number of global calls to discuss the plan at

a high level to ensure it would work from an operational

perspective.

In adopting the changes, CSL was initially concerned with

how their overseas based executives would be able to trade

their shares. With the launch of the share sales facility via

Employee Online, concerns disappeared as they knew we had

a solution when required.

What are the new plans?

The Retain and Grow Plan (RGP) are Restricted Share Units

that provides eligible employees with an opportunity to share

in the success of the company, aligned with shareholder

interests. The Executive Performance and Alignment Plan

(EPA) are Performance Share Units and are intended to

incentivise eligible executives and to align the interests of

executives with the interests of the shareholders.

What were some of the challenges?

As a global organisation, CSL had to account for multiple tax

and legal jurisdictions. Having to manage varying quantum

of rights per country based on the size and importance of

that country. Communicating to executives globally was also

significant factor in ensuring executives bought into the new

plan design. Furthermore, having a partner that was able to

support the administration of the global plan was going to be

critical to its success.

Benefits

Multiple benefits were derived from the result of the change

of plan and the approach undertaken to engage staff globally.

Affected staff were highly engaged and they appreciated the

individual 1:1 presentations.

Furthermore, by changing how executives are remunerated,

CSL avoided a 2nd strike in 2017, with 88% of shareholders

agreeing to vote in favour of the company’s revamped

remuneration report.


Case studies

AGM OUTCOMES

2017 remuneration strike report — ASX 300

Table 3: ASX 300 number of strikes

STRIKE 2014 2015 2016 2017

No. of companies receiving a first strike

14 15 17 10

No. of companies facing a second strike

14 15 17

No. of companies receiving a second strike (company required to put spill resolution)

1 4 1 3*

Spill meetings 0 0 0 0

*Note: it includes AJX who was in the ASX 300 in 2016 but not in 2017

In examining the ASX 300 companies’ remuneration

report resolution, 12 companies received a strike in 2017.

For 10 companies it was a first strike, however for two

companies, Mineral Resources Limited (MIN) and Mortgage

Choice Limited (MOC) it was the second strike. In 2016 MIN

received 49.18% and MOC received 79.54% votes ‘against’

the remuneration report resolution. In 2017 the companies

respectively received 41.48% and 32.00% ‘against’ votes.

As a result of receiving a second strike and in accordance

with the ’two strikes’ rule introduced in 2011 by the Australian

Government, both companies were required to put a spill

resolution to the meeting and if the spill resolution received

more than 50% in favour then a spill meeting would need to

be held within 90 days of the AGM to re-elect the board. Both

companies were not required to prepare for a spill meeting as

the spill resolution received less than 50% of votes in favour.

Alexium International Group Limited (AJX), which was

in the ASX 300 in 2016 but not in 2017, also received a second

strike in 2017 but was not required to hold a spill meeting

as it also received less than 50% of votes in favour of the

spill resolution.

Of the 12 companies receiving a strike, only one decided the

remuneration report resolution on a show of hands, all others

put the resolution to a poll.

ASX 300 companies who received a first strike in 2017

The 10 ASX 300 companies that recorded a first strike in

2017 will now need to prepare and address issues raised

by shareholders on the remuneration report by engaging

in discussions with proxy advisers and large institutional

shareholders on remuneration report policies to avoid a

second strike in 2018 and a possible spill meeting.

Of the 12 companies receiving a strike, only one decided the remuneration report resolution on a show of hands, all others put the resolution to a poll.

Case studies


The remaining 15 companies put the remuneration report

resolution to poll at their respective AGMs. In examining the

poll results, only three companies, receiving more than 25%

of votes ‘against’ the remuneration report resolution, were

required to put the spill resolution to the meeting as required

by the Corporations Act. The spill resolution results for all

three companies were conducted via a poll and no company

was required to hold a spill meeting as all results showed the

spill resolution for each company had received more than

50% of votes ‘against’ the resolution.

ASX 300 companies facing a second strike in 2017

In 2017, 17 ASX 300 companies had to prepare for a second

strike, compared to 15 in 2016 and 14 in 2015.

Two companies facing a second strike were UGL Limited

(UGL) and Cover-More Limited (CVO) — both companies

delisted in 2017 and as a result no Annual General Meeting

was held.

1. All 15 companies who held their AGM decided

remuneration report via a poll.

2. Eight companies received more than 90% of votes in

favour of the remuneration report resolution.

3. Four companies received between 75% to 88 % of votes

in favour of the remuneration report.

4. The three companies who received a second strike,

recorded ‘against’ votes between 32% to 41%.

5. Two companies did not hold their AGM in 2017 as they

were delisted.


Case studies

Companies facing a spill meeting in 2017

No company in the ASX 300 was required to hold a spill meeting in 2017. A spill meeting is required to be held when a spill

resolution receives more than 50% of votes in favour.

Table 4: 2017 ASX 300 poll vs show of hands summary

REMUNERATION REPORT (COMPANIES RECEIVING FIRST STRIKE)

REMUNERATION REPORT (COMPANIES FACING A SECOND STRIKE)

SPILL RESOLUTION (COMPANIES RECEIVING A SECOND STRIKE)

SPILL MEETINGS TO BE HELD

POLL 9 15 3 N/A

SHOW OF HANDS 1 0 0 N/A

RESOLUTION NOT PUT TO THE MEETING

N/A 2 N/A

TOTAL 10 17 3 0

In examining the poll results, only three companies, receiving more than 25% of votes ‘against’ the remuneration report resolution, were required to put the spill resolution to the meeting as required by the Corporations Act.


Executive Summary

14Global

insights

While it’s not quite tax “reform,” at least for individual taxation, major tax-law changes have now been adopted.


Global insights

GLOBAL INSIGHTS

USA — New US tax law affects employee equity plans

At the end of 2017, the U.S. Congress passed the “Tax Cuts &

Jobs Act”, and the president signed it into law. The provisions

under this law go into immediate effect and will affect taxes

on equity compensation in 2018. Following is an excerpt from

an article by Bruce Brumberg, editor-in-chief and founder of

myStockOptions.com, an independent and unbiased source of

expertise on stock options, restricted stock, restricted stock

units, performance shares, stock appreciation rights, and

employee stock purchase plans.

While it’s not quite tax “reform,” at least for individual

taxation, major tax-law changes have now been adopted. The

Tax Cuts & Jobs Act has provisions that directly and indirectly

affect stock compensation, whether in personal financial

planning or in company stock plan administration. Compared

with some earlier proposed provisions that didn’t survive the

legislative process, these are not really significant beyond the

change in the alternative minimum tax (AMT), which affects

incentive stock options.

The core tax treatment of stock compensation has not

changed. Below are the provisions that affect individual

taxation of stock compensation. (The individual tax rates and

AMT changes end after 2025, reverting to the current rates

unless extended.)

1. Changes in the rates of individual income tax. The Tax

Cuts & Jobs Act keeps the current seven tax brackets,

reducing the rates and changing the income thresholds

that apply. The new rates are 10%, 12%, 22%, 24%, 32%,

35%, and 37%, with the top bracket starting at $600,000

for joint filers ($500,000 for single filers).

The flat supplemental rate of federal income tax

withholding on stock compensation is based on the seven

brackets. For amounts up to $1 million it is linked to the

third lowest rate (22%). For amounts over $1 million

it is linked to the highest rate (37%). The 22% rate of

withholding may not cover the actual taxes you will owe,

so you need to know the tax bracket for your total income

and assess the need to put money aside or pay estimated

taxes.

2. Changes in the calculation of the alternative minimum

tax (AMT). The income spread at incentive stock options

(ISOs) exercise can trigger the AMT, which warrants

complex tax planning. While the AMT or how it applies to

ISOs is not repealed, below are the new numbers in the

AMT calculation (to be adjusted annually for inflation).

� The 2018 AMT income exemption amount rises to

$70,300 (from $54,300) for single filers and to

$109,400 (from $84,500) for married joint filers.

� The income where this AMT income exemption starts

to phase out in 2018 is substantially adjusted upward

to begin at $500,000 for individuals (from $120,700)

and $1,000,000 (from $160,900) for married couples.

These higher AMT income exemption amounts, and the

much higher income point where the phaseout starts,

make it much less likely that ISOs will trigger the AMT.

With fewer employees at risk of triggering the AMT by

exercising ISOs and holding the shares, companies may

start to grant ISOs more frequently, given their potential

tax advantages for plan participants.

What pays in part for this change in the AMT calculation

is the $10,000 cap on the deduction for state and local

income taxes and real-estate property taxes on tax

returns. Given the odd way in which the AMT is calculated,

those deductions may have triggered or added to your

AMT in the past. Strangely enough, given that new cap, a

taxpayer who has been paying the AMT may see less tax

savings than they might otherwise expect to get from the

AMT change.

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Global insights


3. New type of qualified stock grant for privately held

companies. The final legislation adopted as one of its

provisions a version of the Empowering Employees

Through Stock Ownership Act. This provision lets an

employee in a privately held company elect to defer taxes

at option exercise or RSU vesting for up to five years

as long as the company’s equity awards meet certain

conditions (the version of this provision that passed the

House in 2016 allowed seven years).

4. No change in the capital gains rates (15% and 20%).

A reduction in ordinary income rates would lower the

difference between your income tax rate and your capital

gains rate. This reduced differential might affect your

tax-planning decisions, e.g. whether to hold shares at

exercise, vesting, or purchase. While there is no change in

these rates, the tax law creates a new income threshold

for when the rate on long-term capital gains and qualified

dividends goes from 15% to 20% ($479,000 for married

joint filers and $425,800 for single taxpayers). That

threshold is no longer similar to that of that top tax

bracket.

1 2016 Employee Stock Purchase Plan (ESPP) Survey (July 2016)2 2016 Employee Stock Purchase Plan (ESPP) Survey (July 2016)3 ESPP Design and Participation Analysis, Computershare and Aon (May 2017)

Furthermore, while the Republican Congress did not seek

to alter the capital gains rates themselves, they do still

want to repeal the 3.8% Medicare surtax on investment

income, including stock sales, that is paid by high-income

taxpayers to fund Obamacare. The new tax law simply

repeals the penalty for not buying health insurance.

5. Repeal of the performance-based exception to the

Section 162(m) limit on deductible compensation.

Publicly traded companies will no longer be able to deduct

annual performance-based compensation (e.g. stock

options, performance shares) in excess of $1 million for

the CEO, CFO, and the top three highest-paid employees.

For compensation paid under written plans existing as of

November 2, 2017, an exemption applies as long as the

plan is not modified. While that repeal does not affect

financial planning, it further reduces the incentive for

companies to favor one type of equity award over another.

For further details about the impact of the tax legislation on

equity comp, including links to in-depth tax resources, visit

myStockOptions.com.

ESPPs CONTINUE TO GROW AMONG US COMPANIES

Another area of growing interest in the U.S. is in the

employee stock purchase plan (ESPP). This contributory plan

allows employees to have a portion of their salary withheld

from each pay check and then used to purchase stock in the

company, often at a discount.

In a study in 2016 conducted by the National Association

of Stock Plan Professionals (NASPP), the National Center

for Employee Ownership (NCEO) and the Certified Equity

Professional Institute (CEPI), 88% of all respondents

offered an ESPP. An additional 7% were in the process of

implementing or at least considering an ESPP.1

The same study showed that among those companies that

offer an ESPP, 92% are tax-qualified plans. A tax-qualified

plan provides certain tax benefits to participants if the plan

meets specific plan design criteria. Companies may also offer

a non-qualified plan, which has no design restrictions but also

no special tax benefits.2

Computershare’s U.S. Plan Managers also partnered with

Aon in 2017 to do a comprehensive review of plan design and

participant behaviour among its 240 ESPP clients and their

collective 1.8 million plan participants.3 Some of the more

interesting data points out of this study included:


Global insights

� Participation in terms of how many employees enrol in

the ESPP and their average contribution rates are higher

among tax-qualified plans versus non-qualified plans.

� More time between purchases is more common than less

time. Monthly purchases are the most popular, followed

closely by quarterly and semi-annually. The longer

timeframe between purchase periods can help reduce the

administrative burden and may create more excitement

among participants, as each purchase becomes more

of an “event”. Interestingly, annual purchases are fairly

uncommon, likely because it is too long to ask participants

to have their contributions tied up prior to a purchase.

� The most common discount is 15%, which is the maximum

allowable for a tax-qualified plan. Although the higher

discount means a higher tax cost for the employer, it

also means higher participation, which is likely why most

employers prefer it.

4 Computershare Share Plan Survey (2014)

There is no clear evidence or consensus as to the reason why

ESPPs are on the rise. However, in the U.S, wages have been

stagnant over the past decade. ESPPs are an inexpensive

way to offer broad-based stock ownership. It is possible

that offering employees an ESPP with a discount or a

company match is a way to provide additional compensation

to employees at relatively low cost. It is also true that

participation in an ESPP correlates with better employee

behaviour, including higher productivity, fewer absences, and

a more positive attitude towards the company. This might

also account for the uptick in plan interest.4

Computershare’s US Plan Managers regularly holds webinars

on various topics related to employee stock purchase

plans, such as understanding the costs of ESPPs, trends in

plan design, and employee communications. Participation

in these webinars is very strong, with several hundred

issuers attending. In fact, interest is so high in this area

that Computershare is launching the first-ever ESPP Day

conference, a one-day event dedicated to educating issuers

on ESPP--where attendees will learn how these plans work,

how to implement one, the very best ways to communicate

a program and much more. The event will be held February

8, 2018 in New York City. Interest is already so high, that

a second event is planned for November 2018 in the San

Francisco area.

The longer timeframe between purchase periods can help reduce the administrative burden and may create more excitement among participants, as each purchase becomes more of an “event”.

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Global insights


Asia

An encouraging year with strong enrolment rates and State support

The previous trends of employee share plans in the Hong

Kong/China market have continued, particularly where

companies are moving from Stock Appreciation Rights

and Stock Option Plans towards Restricted Share Awards

(Executive) and broad-based Employee Share Purchase Plans

(ESPPs). Of the companies offering ESPPs, the majority offer

a share match incentive (versus discount). As these share

plans provide many Chinese employees with the opportunity

to hold overseas listed shares, we have witnessed strong

enrolment rates within China compared to other global

jurisdictions. This is obviously dependent on the development

of effective communications strategies for these plans that

are tailored to local languages.

From a regulatory perspective, over the past few years, the

China Securities and Regulatory Commission (CSRC), the

Ministry of Finance (MoF) and the State Administration of

Tax (SAT) have published circulars that further clarify the

treatment of employee equity as well as promote the use of

employee equity incentives in the China domestic A-share

market. Furthermore, in the past year China announced

plans to ease ownership limits on foreign joint ventures and

Shanghai State Administration of Foreign Exchange (SAFE)

simplified the registration and submission process.

Shanghai SAFE changes its registration submission process

With the increase in overseas listed companies offering

employee share incentive plans in China, the local regulators

sees the need to address the strict foreign exchange policy.

In 2007, PRC State Administration of Foreign Exchange

(“SAFE”) released, the first related regulation, circular 78,

specific to the movement of funds resulting from Chinese

Nationals participating in overseas listed share incentive

plans. However, as many practical administrative procedures

was unclear, SAFE replaced this circular with a more coherent

and clear but more stringent guide, Circular 7, in Feb 2012.

This guide clearly states the requirements for overseas listed

companies and their responsibilities for adhering to SAFE’s

regulations, including:-

� Share plan registration requirements

� Centralised foreign exchange bank account setup

� On-going plan quarterly report filing to SAFE

� On-going changes report filing

� On-going annual report filing and renewal of SAFE Quota

Effective from October 2017, the Shanghai Branch of the PRC

State Administration of Foreign Exchange (“SAFE”) requires

companies that maintain, or plan to maintain, their dedicated

foreign exchange account with Bank of China, Citibank or

HSBC are to submit registration applications under Circular

7 to the three banks, rather than directly to Shanghai SAFE.

Applications submitted to the three banks enjoy priority to

be reviewed by Shanghai SAFE, but Shanghai SAFE retains

the authority to review and approve any applications.

Companies that do not maintain or plan to maintain their

dedicated foreign exchange account with these three banks

are expected to continue to submit their applications directly

to Shanghai SAFE. If the new submission process works to

Shanghai SAFE’s satisfaction, Computershare expects that

this approach may be adopted in out tier one cities and /or

expanded to include more banks.

Further opening up of China finance sector to more foreign ownership

As a result of US-SINO presidents meeting, , on 10th November

2017 the Chinese government announced plans to ease limits

on foreign ownership of financial services groups, including

commercial banking, securities, futures, asset management

and insurance. Foreign investments in securities, futures and

funds management may increase the ownership limit from

49% to 51% maximum, and such limit will be eliminated three

years later where foreign investors are allowed to wholly own

the company in these three financial industries. Following Xi’s

new leadership, China is committed to financial liberalization

and opening up to allow greater market access for foreign

investors. Computershare expects that specific rules and

regulations with respect to the implementation of this policy

will be released in the coming year.

Seth Bohart Managing Director, Computershare Plan

Managers Asia

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10 November 2017

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Global insights

UK & Europe

UK all employee plans

Save-As-You-Earn (SAYE) and Share Incentive Plan (SIP)

are the most popular UK all employee plans give their tax-

advantaged status. Their wide adoption gives us a rich source

of data from which we can draw conclusions on the relevance

and attractiveness of employee share ownership.

With both SAYE and SIP benefiting from an increased

maximum monthly contribution limit in recent years, the

positive trend in average monthly contribution, whilst

unsurprising on the surface, seems to indicate positive

sentiment for these savings and investment vehicles.

SAYE & SIP AV. MONTHLY CONTRIBUTION

2012 2013 2014 2015 2016

SAYE (ACROSS ALL GRANTS)

£106 £108 £123 £156 £158

SIP £83 £66 £80 £89 £89

Source: ProShare SAYE & SIP Report 2016

5 Attitudes to Employee Share Ownership, ProShare, 2017

While SAYE remains more popular than SIP overall, SIP

participation is in decline, dropping 8% in four years. SAYE

has enjoyed rising participation in recent years, but has flat-

lined year-on-year for 2015-16. This indicates that perhaps

employees have reached their peak ability to invest post

recession. However, soon to be published figures for 2017 will

confirm if this trend continues.

SAYE & SIP AV. PARTICIPATION

2013 2014 2015 2016

SAYE / 33% 36% 36%

SIP 37% 33% 31% 29%

Source: ProShare SAYE & SIP Report 2016

A recent study5 offers some new and insightful analysis for

the share plan industry to consider in terms of launching

and targeting plan types based on gender, age and other key

drivers.

For SAYE, ‘affordability’ has been cited as the most common

reason for non-participation across all age-ranges in the

workforce — 40% said they couldn’t afford to take part.

Contrary to a widely-held assumption, only 7% of Millennials

said that they didn’t think they’d be at the company long

enough to benefit - the lowest score across all age groups. Is

there more employer loyalty in this age segment than they

are given credit for?

When asked what changes would make SAYE more attractive,

non-participants most commonly cited a shorter savings

term (companies can offer three- or five-year plans), closely

followed by the ability to vary the monthly contribution

(currently employees have to choose a fixed amount for the

duration of the plan).

When looking at SIP, reasons for non-participation again lead

with affordability, followed by a lack of understanding of how

the plan works.

There are many more insights to be drawn from this study,

which together can be viewed as a catalyst for a more

informed debate about share plans. It is clear that there are

segments of the workforce who feel that share plans are not

for them, are unaffordable, or are too complicated or risky.

With SAYE and SIP approaching 40 and 17 years old

respectively, thoughts in the industry are starting to align

behind lobbying for updates to these plans with some

recent success seen in extending the ability to pause SAYE

contributions from 6 to 12 months. These changes are being

seen as increasingly important in ensuring they remain

relevant and able to meet the objectives of both employer

and employee long into the future.

GalloL

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Global insights


Discretionary plans

There has been little change overall in the UK and Europe

around LTIP practice, with full-price share awards still

favoured over options. LTIP design still centres on

performance shares instead of restricted stock and their

use is predominantly saved for executives and senior

management.

Looking at executive remuneration through the lens of

corporate governance reveals a number of proposals and

policy announcements this year:

� In March, Germany introduced clawback provisions on

bonus payments for top managers and material risk

takers in the banking sector. Grants will be subject to

clawback for a minimum of five years, and would be

triggered in the event that an individual had caused

regulator sanctions or massive loses. This is first time

clawback has been prescribed in German law, and brings

policy more closely in line with the UK.

6 Review of FTSE 100 Remuneration Reports for 2016/17, Tapestry

� In the light of two high profile business failures, BHS

and Sports Direct, a UK Government report in April 2017

raised proposals to hold directors to account and align

bonuses with broader corporate responsibilities and

objectives. It also proposed the phasing out of LTIPs

(to be replaced with restricted or deferred shares) - the

idea being that long term awards should be more closely

aligned to share price increase than complex shorter term

performance conditions.

� Reforms to the UK Corporate Governance Code

introduced in August 2017 again focused on executive pay.

Companies are to be required to publish the ratio of CEO

pay to average UK worker pay, and provide a narrative to

explain changes and context.

� Continuing the theme of increasing shareholder

disclosure, further updates to the Investment

Association’s Principles of Remuneration were published

in November 2017 to ensure executive remuneration in

the UK is well designed and justified in the context of the

company, its business, its performance and, increasingly,

its wider workforce.

Policy announced in previous years is starting to show and

impact in remuneration practice. In a review of FTSE100

Remuneration Reports for 2016/176, post-vest holding periods

have become more prevalent. 73 companies now enforce

holding periods, up from 53 in the previous report. The report

also highlighted an upward trend in executives being required

to hold shares beyond termination, ensuring they don’t sell

prior to potential problems being revealed.

Looking at executive remuneration through the lens of corporate governance reveals a number of proposals and policy announcements this year


Global insights

Market and Regulatory round-up

Global equity markets continued the upward trend that began

towards the end of 2016. The weak Pound, continued low

interest rates, the failure of populist political movements in

Europe, and the promise of new tax law in the US are but a

number of factors that have combined to ensure a record

year for markets.

As a result, the fear of negative interest rates for the UK

failed to materialise, with central banks tending to maintain

rates or implement small increases (as was the case in the

UK). As a result, the viability of UK SAYE plans, which are

underpinned by the earnings from savings balances, is no

longer under question.

The regulatory conversation has been dominated by two

pieces of European law:

1. Markets in Financial Instruments Directive II (MiFIDII)

— seeking to strengthen investor protection and increase

confidence in markets, MiFIDII has introduced significant

changes for plan administrators, issuers and participants.

From January 3 2018, any participant trading from a

plan will now need to provide a form of identification.

There are now more stringent regulatory reporting

requirements a requirement to produce quarterly

statements for account holders. Significant efforts

have been made to develop systems to support these

requirements and communicate these changes to our

clients and participants.

2. European General Data Protection Regulation (GDPR)

— GDPR finally comes into effect in May. Computershare

have been working closely with clients to understand and

prepare for the changes, particularly in ensuring that

contracts, terms and conditions and privacy statements

are compliant, and that the necessary consents are

in place for the flow of data that is so crucial to plan

administration can continue.

Regulatory changes are part of the modern landscape

impacting share plan schemes and remuneration.

However, with continuing political and policy

developments in Europe coupled with the impact of Brexit

and the introduction of gender pay gap reporting in UK

the next few years will likely have significant impact on

the industry.

Regulatory changes are part of the modern landscape impacting share plan schemes and remuneration.

GalloL

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Executive Summary

22Perspectives


Perspectives

PERSPECTIVES

Allens Linklaters

Insights into Employee Equity Trends — Tax and Regulatory

Environment (Australia) 2017

1. Tax and regulatory changes and their practical impact

on listed companies

1.1 Changes to the taxation of employee share schemes

As we have previously reported, sensible legislative

changes were made to the taxation of employee share

schemes (ESS) in Australia for awards granted on or

after 1 July 2015. One of the main implications of those

changes was to generally move the taxing time of rights/

options from vesting to exercise. As a result of these

changes we have seen in the last year some employers

return to granting performance rights which include an

exercise period post vesting of those rights.

1.2 Tax rulings in 2017

The Australian Taxation Office (ATO) issued six Class

Rulings dealing with employee equity awards. The Class

Rulings mainly relate to corporate events affecting

shareholders that also had some impact on employee

equity awards (i.e. Centuria Group’s restructure to

form a stapled security structure (CR 2016/90), the

Asciano takeover and special dividend (CR 2016/94), the

Afterpay Holdings Limited merger (CR 2017/50), Alcoa

Corporation’s separation from Alcoa Inc (CR 2017/59)

and Kore Potash Limited’s re-domiciliation to the UK (CR

2017/88)). Very generally, it would appear that in each

of those rulings sensible tax outcomes were able to be

achieved for the employee equity award holders. The

Pfizer Inc. Class Ruling (CR 2017/83) considers the tax

consequences for employees who participate in Pfizer

Inc’s employee incentive schemes.

In 2017 the ATO also issued the following ESS products:

(a) Tax Determination TD 2017/26 Income tax: employee

share schemes - when a dividend equivalent payment

is assessable to an employee as remuneration. In the

TD, the ATO states that a dividend equivalent payment

paid by the trustee of a trust to an employee will be

assessable to the employee as remuneration under

section 6-5 of the 1997 Act where the employee

receives the payment for, or in respect of, services

provided by the employee, or more generally, where

the payment has a sufficient connection with the

employee’s employment. This reverses the position

that the ATO had previously adopted at paragraph

40 of Class Ruling CR 2013/15. This is also the case

notwithstanding that the trustee is likely to have paid

tax on the underlying dividends received by the trust

at the top rate under section 99A of the 1936 Act.

Appendix 2 to the TD (which replaces PCG 2017/D9)

sets out the Commissioner’s practical administration

approach as to when he will accept that a dividend

equivalent payment is not for, or in respect of, services

provided as an employee. Some of the requirements

are that the trustee of the trust must not be an

associate of the employer and the dividend equivalent

payment must not be paid in relation to the employee’s

continued employment. Furthermore, the dividend

equivalent payment must not arise from a contractual

agreement to which the employee and employer are

party and it cannot be paid by the employer, in lieu of

the trustee making the payment. In practice, employers

do not generally implement arrangements of the type

that would satisfy all of the safe harbour requirements,

and therefore the safe harbour is unlikely to have

much practical application. The TD applies to dividend

equivalent payments where they are paid under the

terms and conditions attached to ESS interests granted

on or after 1 January 2018. For ESS interests granted

before 1 January 2018 that have dividend equivalent

entitlements, the ATO’s general administrative practice

will be to treat any such dividend equivalent payments

as not assessable to the employee as ordinary or

statutory income (provided that the dividends were

assessed to the trustee under section 99A in the

income year in which the dividends were received).

Perspectives


(b) Draft Ruling TR 2017/D5 Income tax: employee

remuneration trusts, which replaces Draft Ruling TR

2014/D1. The ATO’s views in TR 2017/D5 have not

materially changed from those expressed in TR 2014/

D1 except that TR 2017/D5 excludes ESS to which

Division 83A applies (which is welcomed news for listed

companies operating employee share trusts).

1.3 Regulatory developments

The Australian Securities and Investments Commission

(ASIC) Class Order CO 14/1000 continued to facilitate

the operation of ESS of ASX-listed entities, and entities

listed on certain foreign exchanges, by providing

welcome corporate regulatory relief. During 2017, ASIC

expanded the range of foreign exchanges to include

Euronext Brussels and Euronext Lisbon. The regulator

also continued to expand on the relief in individual cases

to address circumstances not captured by the Class

Order but nevertheless consistent with its underlying

policy. We have outlined examples of such expansions in

previous updates, including the relaxation of the criteria

for an entity’s contractors to participate in an ESS, the

extension of the relief to other types of ESS interests,

and the removal of the three-month listing requirement

for eligibility (in particular in the context of corporate

transactions such as mergers and demergers). Of

note this year was ASIC’s willingness to adapt the ESS

trust requirements in the Class Order to accommodate

analogous foreign custodian arrangements for a French

entity.

In separate developments, the Federal Parliament

has passed the Government’s Banking Executive

Accountability Regime (BEAR) legislation. When it

commences, the BEAR will impose a range of new

obligations affecting authorised deposit-taking

institutions (such as banks, building societies and credit

unions) (ADIs) and their subsidiaries, directors and senior

executives. In part those obligations are designed to

influence the remuneration received by such directors

and executives, including remuneration provided

under ESS.

Under the BEAR, ADIs will be required to defer portions of

the annual variable remuneration (ie remuneration that is

conditional on the achievement of objectives) of relevant

directors and executives for a period of four years.

Depending on the size of the institution and whether or

not the relevant person is the CEO, the required portions

range between 40 per cent and 60 per cent of variable

remuneration or between 10 per cent and 40 per cent

of total remuneration, whichever is lower. The deferral

will not automatically end if the relevant individual

ceases employment (although from a tax perspective

that remains a deferred taxing point). However, an

application can be made to APRA to shorten the four

year period where, among other things, the person has

ceased to be an accountable person of the ADI. The ADI

will also be required to adopt and enforce remuneration

arrangements that require the variable remuneration

of a relevant person to be reduced by an amount that

is proportionate to any failure by the person to comply

with their personal obligations under the BEAR. These

arrangements have clear implications for the design

and implementation of ESS for ADIs, and will need to be

worked through carefully before the commencement of

this component of the BEAR in January 2019 (or July

2019 for small and medium ADIs).

2. What we expect to see in 2018

(a) In April 2017 the ATO released a consultation paper

seeking industry input to help shape the ATO’s public

guidance on the operation of the ESS tax provisions

in Division 83A (submissions closed on 7 June 2017).

The ATO is understood to be working on updates to

its ESS guidance materials. It is hoped that the ATO

will clarify its views in relation to dividend waivers

and employee share trusts amongst other areas of

uncertainty in the application of Division 83A.

(b) Some guidance from the ATO on its view of fixed

remuneration equity arrangements involving locked

up shares which may have previously been offered as

post-tax shares (e.g. NED Share Plans) being delivered

as the grant of rights to shares.

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Perspectives

(c) In executive share plans:

(i) A continued increase in cash discretions in scheme

rules for rights plans as a useful tool to achieve

sensible tax outcomes for equity award holders

in various circumstances, including on cessation

of employment before vesting and where there

is a corporate event impacting both shareholders

and employee equity awards (eg. see the Centuria

Group Class Ruling CR 2016/90).

(ii) A review of performance conditions to ensure they

continue to be relevant and motivating.

(iii) Continued tweaking of scheme rules to ensure

appropriate clawback rules and alignment with

termination benefit restrictions.

(d) In all employee share plans:

(i) Consideration of whether changes to the plan rules

are needed, given the rapidly changing work-force

(e.g. should the vesting periods be shorter, should

the category of participants be broader, should

there be pausing in vesting for career breaks?).

(ii) More creative thinking about whether the plans

could be used more effectively to meet company

goals which require buy-in from the whole work-

force (e.g. level of matching awards linked to safety

or environmental goals rather than only retention).

KPMG

Expert insights in to employee equity trends in Australia: market trends for this year and what’s on the horizon.

Employee share schemes (ESS) are common practice across

the ASX 150, with companies investing significant time and

financial resources to design, implement and manage the

resulting plans.

Due to the significant investment, Boards are asking, are

we getting bang for our buck? How do we bring equity back

to life?

The answers are:

� Restore value to these plans (even if reducing quantum)

� Clearly link them to strategy and performance

� Communicate communicate communicate (and clearly)

1. Enough is enough

Boards are well aware of community and political concern

at the quantum of executive remuneration.

There is a breakdown in trust between shareholders and

boards (that shareholders do not trust Boards to do the

right thing) and often between Boards and management

(to the detriment of optimising performance) where

Boards make ‘populist’ decisions to exercise discretion

against management.

This will no doubt be exacerbated by the introduction

in the UK and US by the publication of the CEOs pay as

a multiple of average workers income, which will also

operate to highlight the gap for employees which in

turn will also create distrust between the top levels of

management and the rest of the organisation.

To date, equity has played a role in bringing employees

across the whole organisation together, with the intention

that with ‘skin in the game’, employees at all levels are

more likely to ‘act and think like an owner’ (leading to

increased productivity and long term decision making).

In turn, theoretically, employees should also reap the

benefits of the dividend distributions and share price

growth which they have helped to deliver. However, this is

not always the case.

Perspectives


2. What has failed in our current structure?

Many Boards have taken the opportunity on a change in

leadership to reduce fixed pay levels of senior executives.

However, it is often the part of remuneration that is

variable (ie STI and LTI) that attracts the largest level of

scrutiny. The quantum of incentives, especially of LTIs,

has increased as downward pressure has been exerted

on fixed pay — amplified for LTIs because of the lower

likelihood of vesting.

However, research shows that in volatile industries, where

it is difficult to set long term targets, three or four years

out from vesting, LTIs do little to motivate and executives

place a heavy discount on their existence — particularly

where vesting is dependent on an external measure,

perceived to be outside the control of management (eg,

relative Total Shareholder Return). While there is clearly

a strong relationship between company performance

and share price, the two are not always immediately

temporally linked (whether because of extraneous market

factors or because ‘good’ results do not meet with

analyst’s expectations leading to a ‘correction’).

Similarly, at lower levels across the organisation, where

significant investment is made in administering broad

based ESS plans to encourage employees to ‘think and

act like shareholders’ and ‘share in the success’ of the

company, some companies struggle to get employees

to see the benefits in participating in these plans. In

other companies, where offers have been made year on

year, it has become an expectation of employees that

they are simply ‘gifted’ equity each year. The offer does

not link company performance with the annual grant of

shares and the reduction or removal of such an offer can

actually act as a demotivator. This is especially true, when

employees consider top management are being paid the

‘big bucks’.

So how do we get equity to work as we intend it to?

3. Solving for the executive level

The purpose of long-term incentives (LTI) is to attract

top talent, retain that talent and reward delivering the

company’s long-term strategic priorities. These plans

should ideally be a tool within the CEO and Board’s

‘people tool-kit’.

However, the LTI often does not serve these purposes:

� Infrequent vesting, ie a company that does not have

a good track record of LTI vesting, whether because

of performance or circumstance, will often find the LTI

is not valued by prospective employees and will often

not be valued by existing executives — meaning it does

not play its role in attracting or retaining talent;

� The ‘set and forget’ phenomena, ie once an LTI grant

is finalised, performance periods are often set to run

their course with little to no engagement on progress

against the specified goals during the period. LTIs are

intended to drive performance over the long-term,

however if there are no consistent check-ins on how

the team is progressing towards targets, does it fulfil

this purpose?

� Offer documentation is often overly complicated,

crippled with legal jargon, and fails to excite

participants to deliver exceptional results. Having

invested considerable money, time and effort in

developing incentive programs to drive performance,

it is this last and most important step that is often

given the least amount of attention

The emergence of the variable reward plan

A growing number of companies are adopting so called

‘single’ incentive or reward plans, in place of STI and LTI.

These plans, which combine elements of short and long

term plans by testing against an annual scorecard of

measures but providing the vast majority of rewards in

long deferred equity, attempt to simplify remuneration

structures, better align rewards with evolving strategic

plans and to allow recalibration in the volatile and

disrupted markets in which many companies now operate.


Perspectives

While generally offered at a discount to the former

overall opportunity offered, as a quid pro quo for greater

certainty, the variable reward plan has been introduced

to restore value of these remuneration programs to

senior executives through making the performance

measures more immediately within line of sight while

tying the ultimate value of those rewards to the delivery

of the company’s strategy and ultimately the longer

term experience of shareholders by granting most of the

reward in shares that are deferred over the longer term.

There are multiple variations of these plans, but a

common thread to all is that a very large portion of the

award is delivered in equity, and this equity is ‘locked up’

so that a executives hold a significant financial interest

in the company throughout their tenure, to cultivate the

ownership mentality Boards are seeking to encourage.

Dividend entitlements (or dividend equivalent payments)

are an important part of the share ownership experience

and provide a cash flow to participants in place of the

former cash STI. This latter objective can prove a little

tricky as a result of unnecessarily restrictive tax rules.

Introduction of strategic measures

Rather than completely redesign their plans, some have

instead decided to introduce performance measures into

long and short term plans that better align with long term

company strategy (not just financial performance). While

there have been some spectacular fails in the introduction

of such measures, companies that can articulate the

importance of the relevant measures to their future

business success and explain how these performance

targets will be measured or quantified tend to have

garnered shareholder support for an element of reward

plans being tied to strategic (and often non-financial)

goals.

APRA and ASIC have both publicly supported the

introduction of such measures as an appropriate counter-

balance to simply pursuing financial outcomes at the

expense of long term health of business.

4. Solving for the broader employee population

A broad based ESS is a good way of engaging employees

to think as owners of the business. Anecdotal success

stories regarding such schemes indicate that they can

provide employees with a true sense of ownership and

alignment with corporate strategy.

The taxation regime regarding broadly based employee

share schemes is decades out of date — with the $1000

tax free threshold not having been revised since the

legislation was introduced. Notwithstanding strong

industry and corporate lobbying, this regime has not been

revisited — effectively emasculating the potential power of

such schemes.

Research undertaken by the Australian Office of the

Chief Economist suggests that when compared with their

non-ESS counterparts, companies with ESS plans have

lower employee churn, higher sales, higher value added,

higher labour productivity and higher value added growth.

However, this link weakens as companies get larger and

older indicating that, if a causal relationship exists, the

benefits of ESSs are greatest for small businesses . This

could be due to the fact that larger and more mature

companies:

� Are less likely to achieve significant share price

growth therefore employees don’t ‘value’ their equity

as highly.

� May have offered ESS plans for a longer period and

have become an ‘expectation’ of employees, and their

purpose (of building an ownership culture) has been

‘lost in translation’ over the years.

Perspectives


Re-invigorating the traditional ESS

While not offering such schemes in a year may send a

clear message that these plans should not be expected,

such a drastic act may cause widespread dissatisfaction

amongst the workforce. Instead of this extreme, it is

possible to send the message without revoking such

schemes by:

� Introducing a well-publicised performance gate before

such plans are offered each year;

� Reducing the amount that is offered (ie below

the $1000 maximum) in years where corporate

performance does not hit a target; or

� Offering the plan on a co-contribution basis (ie the

company will provide $500 of shares where the plan

participant agrees to sacrifice $500 of his or her

wages

or salary into shares) in years where performance is

not as good.

Any of these mechanisms can reintroduce an element of

balance where such annual grants are merely expected by

employees without any reference to the performance of

their employer.

5. Create a buzz

Effective communication of plans are critical. Companies

should be revising their communication plans to create

excitement and engagement at the time of offer and

throughout the plan cycle and realise the full potential of

using the equity delivered under the ESS plans as a tool to

develop an ‘ownership’ culture amongst employees and to

drive performance.

This should include:

� when designing plans, involving participant to ensure

the final design is meaningful to them

� revisiting offer documentation to engage and excite

participants

� designing a communications program, involving

multiple touch-points over the plan cycle, to ensure

that participants are connected to their plans through

that cycle — whether this is updates regarding shares

price, dividends/distributions, how the company is,

or individuals are, progressing against performance

targets or gateways.

Plan design, together with ongoing and meaningful

engagement with participants, is critical to realising the

full potential of ESS plans — both at an executive level and

across the organisation more broadly.

Stephen Walmsley

Partner

Leadership, Performance & Reward

[email protected]

Alice Bungey

Senior Manager


[email protected]

Maddy Dickson

Manager


[email protected]


Perspectives

Deloitte

International tax insights

While the taxation of incentives in the hands of permanent

and long-term deployed employees remains testing, it is the

short term business traveller who is now proving to be a

greater compliance challenge for companies. This coupled

with the rise of the contingent and transient workforce will

add even more complexity to the challenge of remaining

compliant when making incentive award grants to mobile

employees.

Business Traveller’s — why is this important now?

A combination of: tax authorities seeking to increase

revenues and close the “tax gap”; intensified sensitivity

around economic migration; and historic non-compliance

with tax obligations has meant that BTs are now a key area of

focus across the globe.

To date, it is the ‘major’ economies that have led the way in

terms of legislating in respect of BTs and providing guidance

on compliance best practice. For example, the UK Short

Term Business Visitor program allows companies to make

an annual submission to HM Revenue & Customs (HMRC) in

respect of their qualifying BT population rather than operate

monthly payroll withholding/reporting (PAYE). Similarly,

in Canada, there is payroll withholding relief available for

qualifying BTs in addition to the waivers available for certain

non-resident employees. The unavoidable flipside where

regulators have provided concessions, is that authorities

demand companies to be compliant and penalties and

interest for non-compliance are greatly increased.

In Australia and other countries that levy tax at the regional/

state level, awareness of inter-state travel is also vital to

ensure compliance at the regional/state level. For state

payroll tax purposes in Australia, if there are incentive plan

participants working in multiple states (or territories) in the

calendar month in which the award is paid or payable then

analysis is required to determine where payroll tax is due.

For example, it could be one of the states that the employee

worked in or the state in which the employer is based.

Compliance activity by regional/state tax authorities focuses

in on inter-state travel.

Sharing of data using the latest technology allows

immigration and tax authorities allows for real time

tracking. This has led to a noticeable increase in the audit of

companies with BTs for non-compliance. Unsurprisingly, audit

activity is most common in the USA, particularly at a state

level with California and New York state leading the charge.

As an example, New York has requested details of expense

and travel histories for the higher paid employees in many

financial services companies that have a known international

presence. Also, north of the border in Canada, the tax

authorities have been pro-actively requesting information

on BTs when a company discloses global transfer pricing

information on the Form T106.

It would be reasonable to expect similar practices in other

countries in the coming years as tax authorities come to grips

with non-compliance.

WHO IS A BUSINESS TRAVELLER (BT)?

� Employee who remains employed in home country

� Short stay(s) in visiting (host) country - normally

travels with visitor visa

� Provides services to the entities in both home and

host countries

Perspectives


Business Traveller’s — why is it so challenging?

Awareness of the complex BT rules and their application

is critical.

For example, BTs coming to Australia from countries without

a double tax agreement with Australia must apply for a

Tax File Number (TFN) via the Australian Taxation Office

(ATO) and then file an Australian tax return. In New York, an

employer will not be penalised for “failing to withhold New

York State tax on wages paid to a non-resident employee

who performs services both in and out of New York state

” for certain employees who work 14 days or less in New

York state (the “14-day rule”). However, this is typically only

applicable to wages. Compensation that relates to services

performed in a prior year (such as the majority of incentive

plans) is specifically listed as an exception to the 14-day rule.

Therefore, incentive plan participants will be liable to New

York State tax if they even work one day in New York State

and the Department of Taxation and Finance have enforced

that in practice.

The relatively long lifetime of incentive awards exacerbates

issues, especially when it is necessary to track employees

across multiple countries to comply with company tax

obligations.

Ensuring that a company has an effective policy for BTs will

require collaboration from tax, human resources/reward,

global mobility, finance and payroll. It therefore remains

important for the HR/reward team in an organisation to take

a role in the design and development of the business traveller

policy, especially as there will be unique rules that apply to

equity which need to be properly considered, but the wider

group will need to be involved in BT policy development.

A lack of a coherent set of rules or principles in regard to how

incentive awards should be taxed in the hands of BTs is likely

to lead to a wide range of interpretations within the company

and thus complexity.

Business Traveller’s — meeting the challenge

There is no one size fits all policy when it comes to BTs,

and the right solution for one company may be the wrong

solution for another. However, there are some points that

every company should consider when it comes to meeting

the challenge posed by BTs and, in particular, BTs holding

incentives.

First, having knowledge of the issues is essential.

Understanding and analysing the rules in the relevant

countries, as well as states and provinces within countries

such as the US and Canada, and the associated risks is vital

ahead of settling on a policy. It is also important to appreciate

what the company is already doing in respect of BTs and

cross-border employees more generally as this is likely to

inform the approach to take in respect of incentives. For

example, if the company is not currently compliant in respect

of visa requirements, this is likely to be a priority matter over

the tax treatment. Therefore any policy or change is likely

to have closing that particular compliance gap as its core

purpose.

Second, once the analysis has been completed, companies

need to decide upon an approach and, where relevant,

formulate a formal BT policy. The risk tolerance or appetite

within an organisation will drive this to a certain degree. A

simple risk based approach with a threshold number of days

(over which companies consider the taxation in all locations)

is the probably the most common in the Australian market.

Probably due to the increasing audit activity in the US, it

is more common to see companies in the US formulating

a policy that seeks higher compliance based on the rules

in each state/country. We expect a more detailed review of

applicable laws in forming a BT policy to become increasingly

common in other markets, including Australia.


Perspectives

The third and final stage is to implement the approach and

policy agreed upon. Increasingly technology is playing a large

part in assisting companies with this as the amount of data

involved in monitoring and managing compliance can be

unmanageable without an automated system in place. In fact,

an increasing number of tax audits are requiring companies

to prove that they are tracking their BT population, this

has been seen in countries such as Canada, China, UK and

the US and the expectation is that will become even more

commonplace in those countries and others.

The rise of the contingent worker

In the same way we have seen the number of BTs rise

significantly in this decade, there is a new type of worker that

is growing in size and is likely to be an increasing concern for

incentive plan practitioners. This group of workers has been

dubbed as “contingent” or “transient” and include those

working in the gig economy and those working remotely

(possibly from another country). In the coming years we

expect that how companies manage the way the workforce is

changing to be a major theme in HR and tax.

As organisations evolve to include more contingent or

transient workers, the role of incentives will need to be

re-evaluated as they may not be an effective way to reward

or remunerate. It will be interesting to see how the role of

incentives evolves to cater for these contingent or transient

workers.

The taxation of incentives in the hands of these workers will

also be a serious challenge, especially as the individual may

be in a country in which the employer has no permanent

establishment. The work performed may even relate to a

project being undertaken in another country altogether. The

question then becomes in which country or countries their

incentives should be taxable. Physical presence, tax residence

and work days seem almost outdated concepts for contingent

or transient workers and it will be fascinating to see how tax

authorities react.

Richard Wilson

Senior Manager

[email protected]

Sandra Buth

Principal

[email protected]

Robert Basker

Partner

[email protected]

About Deloitte Global Equity & Rewards

Our Australian Global Equity & Rewards team is an integral part of the Deloitte Global Incentive Plan network, which is the largest dedicated specialist incentive plan network of any firm. Our purpose is to help organisations by empowering Equity and Reward professionals to fulfil their potential. We achieve this by:

Digitising the remuneration industry

Bringing our best to tomorrows companies

Managing global risk for today companies

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au.

Where we advertise or represent that tax agent services will be provided by us, such services will be provided by a Deloitte registered tax agent.

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Touche Tohmatsu Limited

© 2017 Deloitte Tax Services Pty Ltd

Perspectives


JB Were

Where to in 2018?

The world achieved synchronised growth for the first time

in a decade in 2017. All 45 countries in the OECD, along with

the major emerging economies, grew together this year.

Importantly, this momentum looks set to carry through to

2018. We are expecting global growth to remain in 2018.

Synchronised growth helps build business and consumer

confidence. Two important consequences for investors follow

on from this:

1. Earnings certainty — Momentum in 2018 provides a guide

into corporate earnings growth, which is in the 8-12%

range in the large markets. In addition the US also has the

wildcard of tax cuts, which could provide a further boost

to these numbers.

2. Reduced Recession risk — Recessions can be seen

coming. They are usually precipitated by a market crisis

such as the global financial crisis, but the requisite

problems take years to build up. These are largely,

although not absolutely, absent heading into 2018.

With synchronized growth, positive earnings, and low interest

rates, the path of least resistance is higher. This underpins

our judgment that investors should hold their full portfolio

quota of global equities into 2018. However by August this

year, this will be the longest post-war bull market for US

equities, which raises many questions for later in the year.

Whilst inflation may be of concern for later in the year, other

factors may provide potential surprises. We see little impact

of global politics on the direction of markets in 2018, but

there are three fault lines to watch closely - Trump’s tax cuts

and mid-term elections, Italian politics and Chinese reforms.

In Australia

The Australian economy continues to perform reasonably

well, supported by infrastructure and housing, construction

activity and stronger LNG exports. Business conditions

have been buoyant in 2017 assisting in non-mining business

investment and healthy employment growth.

Against the backdrop of strong business conditions and

employment, Australia has had surprisingly soft wages

growth and low inflation - reflecting similar conditions in

other developed market economies. Weak wage growth,

large increases in energy prices and higher mortgage rates

on some types of home loans has meant that Australian

consumers have tightened their belts in recent months, with

retail sales being particularly weak.

The Reserve Bank of Australia has indicated that it expects

its next policy change to be an interest rate rise. However,

given the uncertainty around the outlook for wage growth

and inflation, RBA Governor Philip Lowe has suggested that

the next move may not be for some time, and markets are

currently not pricing in a full rate rise until early 2019.

Portfolio Positioning

Australian Equities: Australia are trading cheaply

relative to global equities. The lack of growth within listed

shares has contributed to a valuation discount and to an

underperformance world markets during 2017.

If the Australian share market is to sustain its current

valuation, where will growth come from?

Resources: remains the swing factor in terms of forecast

levels of the Australian market. If resource stocks grow

earnings by 10% next year this only adds about 1.6% to

ASX market growth. Consensus forecasts expect resource

earnings to grow by 2% next year but implied earnings

upgrades from using the current spot price of major

commodities shows a potential increase of more than 30%

to the earnings per share growth of miners and 9% in for

energy stocks. The implied increase to earnings in 2019 is

even greater.

Banks: have a forecast growth rate of 2.7% next year but

come with the caveats of record low debt provisioning,

peaking (but not falling) house prices, increased competition

for investor loans, a looming Royal Commission, potentially

transformational IT projects to execute, a flat yield curve, and

the spectre of rising interest rates. In spite of this they are

trading cheaply and dividends would seem to be sustainable

albeit with no growth.


Perspectives

Cyclical Industrials: are trading at full earnings multiples

compared to mid-cycle levels and, in any case do not have

the market weighting to lift overall market growth too much

higher. However, the market will continue to pay for growth

as we have entered a phase where technologically-superior

companies have the ability to optimise logistics chains and

dictate terms to suppliers and customers alike.

Defensive Industrials: offer a mixed bag with REITS offering

value but not much growth, infrastructure offering growth

but not value, healthcare is at historically high multiples

that are not justified by forecast earnings growth, and the

telecommunications sector is still coming to grips with the

NBN rollout.

In summary, the Australian market has the ability to grow

but is heavily dependent on resource sector earnings which,

in turn, are strongly correlated to the ongoing stability

and composition of Chinese GDP growth. In addition, bank

earnings are likely to be smooth but we anticipate the quality

of those earnings may deteriorate.

International Equities: We expect that current growth rates

can continue and support valuations. Although US shares

are trading at a premium to other international markets,

we expect that they can continue to generate acceptable

returns in the short to medium term, particularly if the

proposed tax cuts are enacted in the next few months and

corporate earnings reports for calendar 2017 are in line with

expectations. European and Japanese shares are cheaper

and provide greater exposure to cyclical improvements in the

global economy.

Currency: The Australian Dollar has continued to pull back

from its September highs of over US$0.80 helped by the

significant erosion of the yield premium that Australian bonds

had over US bonds. We believe that the US Dollar can move

higher pushing the Australian Dollar towards the mid-to-low

70 US cent level, particularly once official US interest rates

become higher than Australian interest rates in 2018.

Our default position is that international equity exposures

remain un-hedged due to the diversification benefits that

currency exposures provide. However, if we see short term

reasons for the currency to move higher we will suggest

hedged currency exposures and, at present we don’t see

short term catalysts for the Australian Dollar to move higher,

so we recommend that clients remain currency un- hedged as

we move into 2018.

Richard Sinclair

Director

JBWere

JBWere

JBWere has a proud and distinguished history of building long enduring relationships and providing pre-eminent wealth advice to our clients since 1840. The firm has an entrenched culture of always putting the interests of the client first and achieving successful investment outcomes for them, which has been a critical factor in our unique longevity for these past 177 years.

The strength and stability of JBWere is underpinned by our ownership structure and strategic alliances. We are owned by National Australia Bank and supported by investment research from UBS and Moelis & Company. This enables us to draw on the resources of one of Australia’s largest banks in addition to world-class global investment and research capabilities. Importantly, we maintain an open architecture approach to investing, which means we recommend the most appropriate strategies, investments and products based individual circumstances and needs.

Executive Summary

About Computershare Limited (CPU)

Computershare (ASX: CPU) is a global market leader in transfer agency and share registration, employee equity plans, mortgage servicing, proxy solicitation and stakeholder communications. We also specialise in corporate trust, bankruptcy, class action and a range of other diversified financial and governance services.

Founded in 1978, Computershare is renowned for its expertise in high integrity data management, high volume transaction processing and reconciliations, payments and stakeholder engagement. Many of the world’s leading organisations use us to streamline and maximise the value of relationships with their investors, employees, creditors and customers.

Computershare is represented in all major financial markets and has over 16,000 employees worldwide.

For more information, visit www.computershare.com

COMPUTERSHARE INVESTOR SERVICES PTY LTD

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