What is an equity compensation program?

An equity compensation program manages the portions of an employee’s compensation dealing with some type of holdings of company stock. Companies find it useful to include equity as part of the compensation program to: Encourage employee retention Promote company ownership Provide opportunity to share in company growth Provide value to the employees

What are the benefits of an equity compensation program?

When implemented well, equity compensation can create a workplace with engaged, talented employees while providing cost-savings for employers. It often results in the following benefits: Assists with retaining and engaging employees Helps attract top candidates Earns extra tax credit

What are the types of equity compensation?

While there are many forms of equity compensation, the two most popular are stock options and restricted stock: Stock options. An employee has an option to buy stock at a predetermined price after a certain future date, regardless of fluctuations in the stock value. This can offer a significant reward if the stock value increases. Restricted stock. Shares are given — not purchased — with a restriction, and the employee gets the stock once the restriction lapses. The most common restriction is a waiting period.

What are the tax implications of equity-based compensation?

Most of the issues that arise with equity compensation occur in three areas: Mobility taxation Payroll reconciliation System integration

What is mobility taxation?

Mobility taxation comes into play when a company has employees who work in multiple locations that might have a tax claim on equity compensation earned. Multiple states — or countries — could be able to claim a tax on an equity award if the company granting it has employees who do any of the following: Permanently move between states or internationally Take a short-term assignment in other locations Travel for business

What are the challenges of mobility taxation?

There are four main challenges that arise with mobility taxation: Tax Calculation and Distribution. Most companies don’t calculate taxes for mobility scenarios, so this issue can take them by surprise when they start providing equity compensation because the complexity involved is significant. The calculation is exponentially more challenging for every location added because companies must determine how to distribute the taxes between locations. Ongoing Employee Monitoring. To properly apply mobility taxation on equity compensation, companies need to have thorough, accurate records of each employee’s location over the duration of their employment — down to the day. Data Accuracy. In comparison to a nonmobile employee, mobility taxation on equity compensation can create serious data issues that most companies don’t have systems or vendors in place to solve. Company Growth. The issues around data collection — such as data collection for mobile employees — and tax calculation compound quickly when companies scale, expanding their equity compensation program and growing their locations.

How can an organization plan for mobility taxation?

Solutions to mobility tax complexities vary with the organization, its infrastructure, current systems used, and the number of employees awarded equity. Here are a few solutions companies can consider: Custom approach Synchronizing between systems and vendors Manual tracking in spreadsheets Consulting

How does payroll reconciliation affect the process flow of equity compensation?

A critical portion of any company’s employee equity program involves calculating, withholding, paying, and reporting on taxes required by federal, state, or local tax authorities. At first glance, the process likely seems familiar — an employer withholds tax on equity as they would for other compensation and passes the information to payroll. Payroll then indicates the amount withheld on employees’ W-2 forms as well as transmits the tax to the government. However, there’s a requirement unique to equity compensation that complicates the process: Companies that report $100,000 or more in taxes to report for a single day must pay the withheld taxes within 24 hours of an employee receiving the benefit.

What are the challenges of payroll reconciliation?

Companies must have adequate systems and processes in place to comply with this tight turnaround time. However, there are a few more challenges companies should keep in mind: Discrepancies. One challenge is mitigating discrepancies between the tax amount calculated and submitted to payroll and the amount payroll actually pays. During the reconciliation process, it’s often discovered amounts don’t match due to factors such as mobility taxation, which is an issue for tax reporting. System Errors. It can be difficult to reconcile the reportable income and taxes withheld between the equity systems and the payroll system, particularly if a company is doing so at a large scale or if it needs to account for mobility tax. Deadlines and Penalties. Correct, timely reporting and payments are critical. Missing the deadline or needing a W-2 correction comes with serious penalties, including fines.

How can an organization plan for payroll reconciliation?

Custom solutions can help a company operate more efficiently and reduce error. Companies can benefit from using a system that automates the following steps: Transmit income and taxation information to payroll Receive audit reports from payroll with all income and taxes actually reported for equity compensation in payroll Identify any discrepancies that need further investigation

What are the challenges of system integration?

An equity program’s success is contingent on its ability to quickly and efficiently receive and integrate information from a variety of other sources. Finding a system to organize and facilitate this flow of information — as well as determine what information is needed and how often — isn’t easy. This issue is compounded because the relevant departments’ main focuses often don’t overlap with equity compensation, so knowledge and communication hurdles arise.

How can an organization plan for system integration?

Companies often come to realize that they don’t have the internal resources to integrate the various stakeholders and systems. An outside consulting firm is often necessary to help bridge that gap to help the different elements communicate so the equity compensation program is successful.

How can business disruption affect an equity compensation program?

During times of uncertainty, it’s even more important for organizations to consider automation around their equity programs. Having the equity processes automated could provide more consistent, reliable results, limit the reliance on a single individual or Tribal knowledge, and free up time to allow resources to concentrate on higher value-add items.

What challenges could automation introduce to the process flow?

The uncertainty around which staff members will be available to manage the equity processes can introduce additional risks. Questions to consider can include: What level of training or familiarity is shared among the staff around the processes? What other tasks they might have to complete? These can increase the risk the equity processing isn’t done correctly or in a timely manner.

How can an organization plan for the effects of business disruption on equity compensation?

An organization can plan for business disruption in the following ways: Use of automation. Leverage internal or external tools to perform common tasks. Continue to examine exception reports and alerts to catch unusual situations or potential threats. Standard operating procedures (SOP). Have each staff member document simple guidelines for standard tasks. Keep them up to date and review on an annual basis. Have alternate people or departments test the SOP and perform the tasks periodically to account for human error. Cross training. Identify staff members who can cover one another’s jobs in case of emergencies and provide proper training; SOPs will assist with cross training.

Article

How to attract and retain employees with an equity compensation program

July 25, 2021 · Authored by Tim Oakes

Equity compensation continues to be a popular strategy for companies to attract highly qualified candidates, boost employee engagement, and secure tax savings.

Many companies, optimistic about these benefits, start equity compensation programs without sufficient planning. They’re often surprised to discover the nuanced accounting requirements involved — and the operational systems needed for a program to run smoothly.

Knowing and planning for these potential roadblocks in advance can help companies reap the significant benefits equity compensation has to offer while avoiding the negative consequence that can arise.

The article addresses the following:

What is an equity compensation program?
What are the benefits of an equity compensation program?
What are the types of equity compensation?
What are the tax implications of equity-based compensation?
What is mobility taxation?
What are the challenges of mobility taxation?
How can an organization plan for mobility taxation?
How does payroll reconciliation affect the process flow of equity compensation?
What are the challenges of payroll reconciliation?
How can an organization plan for payroll reconciliation?

Tim Oakes

Principal

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

How to attract and retain employees with an equity compensation program

Tim Oakes

What is an equity compensation program?

What are the benefits of an equity compensation program?

Retain and engage employees

Attract top candidates

Earn tax credit