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Equity Systems Explained and Global Stock Plan Updates at NASPP


chombosan / iStock

Organizations understand equity well enough when it comes to compensation and investments, but how well do they grasp its broader meaning in the latter-day context of diversity, equity and inclusion (DEI)? Depending on who you ask, equity may mean “fairness,” “a piece of the pie,” “a level playing field,” or righting a systemic wrong. It’s easy to label, yet how do we know when we’ve achieved equity in an organization?

“Equity is about systems,” says JeNae Johnson, CEO of CTM Unlimited, a Houston-based human capital consulting firm focused on workplace equity. In her recent keynote address at the National Association of Stock Plan Participants’ virtual conference, Johnson explained that hiring and development systems, even in inclusion-committed companies, show inconsistencies that may exclude people who are not part of the dominant group.


Thus, companies seeking equity in hiring, promoting and rewarding employees need to “build systems that are blind” — that is, systems of talent acquisition and development that are not designed to favor one group over another due to any deliberate or unconscious bias. Johnson noted that equity at companies, or the lack of it, can be described by “statistical predictors, and by examining the historical data to determine the trajectory of a certain group.”

In other words, equity is achieved when human capital systems become blind to employee diversity and can’t predict who will succeed or not based on diversity data. But companies remain challenged when it comes to DEI outcomes. Johnson cited a recent Women in the Workplace study by McKinsey and LeanIn.org, which noted that despite small gains, women remain underrepresented across the corporate ladder, with the C-suite even less represented despite decades of lip service paid by corporate leadership to women’s advancement.

The Business Case

Still, there remains “the business case for equity, and the risk of doing nothing about it is significant,” especially when diverse employee populations feel a lack of equity in the workplace, said Johnson. He offered some Gallup research data estimating that 17% of the U.S. workforce is disengaged. The cost of disengagement, for a firm of 1,200 employees with a median salary of $35,000, amounts to over $2 million annually, while a company with 54,000 employees is looking at a $252 million per year hit. The Gallup formula? Multiply (headcount x .172) x (median salary x .34), said Johnson.

“We believe diversity and inclusion are inputs to equity,” she concluded. “You can’t achieve equity without them, however if you only focus on D and I, you may never achieve equity and your company could still be losing this much money.” Johnson urged her audience to “look at your companies’ strategic imperatives, and at what the CEO has said is important right now,” and be ready to challenge the status quo. “Silence in not an option,” said Johnson. “We want blind systems, not blind people.”

Global Updates

From the microscope of DEI in America to the macro view of global tax and legal changes for companies that offer stock compensation to non-U.S. employees, the NASPP conference offered “Around the World in 60 Minutes.” Baker McKenzie LLP partners Aimee Soodan and Brian Wydajewski walked virtual attendees through an informative share plan update of tax and other changes in eight key geographies: Australia, Canada, China, Germany, Ireland, Netherlands, Philippines, and the United Kingdom.

As expected, many of the proposed or enacted changes are technical refinements that may not rattle too many share-plan windows. But Wydajewski pointed out that Australia, for starters, has proposed significant changes for share-based awards. The first would eliminate termination of employment as a potential taxable event. “That would be very welcome and frankly would align Australia with most other countries,” he said.

The other proposed change would introduce some new exemptions from licensing and prospectus disclosure requirements for public and private companies. Still, change in Australia is incremental at best. “No immediate change, but potentially good news for future grants,” said Wyadajewski,

Canada, on the other hand, had proposed the elimination of beneficial tax treatment in excess of an annual cap on stock option deduction, which was originally intended to come into force on January 1, 2020, but was delayed. Now it is in force, and beneficial tax treatment for options granted by “large corporations” is only available for options up to a CAD$200,000 annual limit per employee.

“The takeaway here is to determine if this new limitation applies to your company — i.e., whether it’s considered a ‘large corporation’ by Canadian standards,” noted Soodan. “If so, determine if option grants exceed the annual cap, and if so, you need to notify employees within 30 days of qualified vs. non-qualified options — and adjust tax withholding and reporting.”

As for updated rules regarding restricted stock units (RSUs), in March of 2021, Canada’s Revenue Agency (CRA) issued an interpretation stating that share awards granted under a plan which provides for discretion to settle the awards in cash or shares are subject to “salary deferral arrangements.” Companies should ensure that their award agreements provide for settlement of RSUs in shares only, the experts advised, paid out within three years from the end of the year in which services were rendered, relevant to the award.

There is also a new Canadian methodology for sourcing RSU income — a “hybrid methodology” that could complicate things for employees. Under this methodology, the “in the money” portion of the RSUs is sourced to employee workdays in the year of grant and any increase in value of the RSUs is sourced to the vesting period.

This is likely to complicate sourcing for mobile employees who hold RSUs due to a mismatch with the typical approach taken by other countries, and it’s unclear whether this overrides the stock option allocation rule in the Canada–U.S. tax treaty. Companies should start withholding and reporting on RSU income for mobile employees based on the hybrid methodology unless facts strongly support that the reward is not for prior-year services.

As for China, its State Administration of Foreign Exchange (SAFE) requires non-PRC public companies to seek approval for share-settled equity awards to “domestic individuals” working in China, with ongoing reporting obligations. Now, SAFE has streamlined its approval process in Shanghai and Beijing, and newly public companies can register their pre-IPO plans provided no shares have yet been issued.

Germany, meanwhile, offers new tax incentives for share-based awards, having raised its annual share-based tax exemptions from EUR 360 to EUR 1,440, along with adopting favorable income tax regime for start-up companies. That’s provided they have fewer than 250 employees, no more than EUR 50 million in annual sales, no more than EUR 43 million total on the balance sheet, and were founded no more than 12 years prior. But companies should master the details of eligibility for these incentives.

Ireland, Netherlands and Philippines have, respectively, new reporting obligations for share-based awards; a proposed tax law change for stock options; and a new Bureau of Internal Revenue position on tax withholding on equity awards. But more aligned with ESG concerns, the United Kingdom has proposed a new 1.25% health and social care tax (or HSC Levy) on equity compensation, to begin April 6, 2022. Historically, equity comp realized by UK-based employees has been subject to considerable National Insurance Contributions, to which the HSC Levy would add before becoming a separate levy in 2023.

“When we look at the future of work and equity awards, with the pandemic and people working remotely, cross-border consideration from U.S. state and tax standpoints is something to think about,” said Baker McKenzie’s Soodan. The clear message: be ready for more change.

About the Author


Matt Damsker is a former principal with Mercer, an author and journalist.


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