Where in the World is Carmen San Diego’s Equity Compensation?

Some of you may remember the video game and game show “Where in the World is Carmen San Diego” (WITWICS.) It was very popular more than a decade ago. The goal of the game was to find the villain, Carmen San Diego, based solely on key facts about different locations around the world. The players had to know the specific country differences that made it possible to identify each unique location and capture the Carmen.

Compensation around the world is as unique in size, design and structure as were the clues to WITWICS. Unfortunately, when looking at most companies’ equity compensation design and awards, it is often impossible to distinguish which continent the participant is on, much less the specific country or region. Plans that don’t include regional differences can result in programs that aren’t effective anywhere.

As compensation professionals, we pride ourselves in the amount of survey data we use. We spend a lot of time and money obtaining and analyzing base pay and STI data that is specific to position and location. We work tirelessly to ensure that our compensation is competitive for those we want to hire, motivate and keep while still fitting within our compensation philosophy. Unfortunately, we often skip this process with equity compensation, especially when it comes to global awards.

This has been a consistent issue since the explosion of global equity plans more than 15 years ago. An engineer in County X, in State Y in the United States makes $90,000, plus a potential bonus of 20%. The company also offers 2,500 stock option shares. The same company pays a similar level engineer in another country base pay of $32,000, plus a potential bonus of 20%. Inexplicably this engineer also gets 2,500 stock options shares.  People have explained this by claiming that there is “too little data” or consistency allows for “easier movement” if the engineer in question has to be moved to a US location. The reality is that, for nearly every company, this is just bad policy.

I admit it. Variable compensation is hard. Global equity is even harder. It’s variable compensation to the fourth power!

1^st  You have the variable nature of equity itself. (Different instruments, available shares and more.)

2^nd Then you have the variability of the current stock price.

3^rd Add to that the variability of currency exchange rates.

4^th Add the volatile changes in unpredictable future stock prices.

Global equity also requires an understanding of constantly changing securities laws, income and tax provisions, expatriate considerations and other factors. Many companies look at the swirl of data and regulations, throw their hands up and beg for mercy.  A minority put a team of people on the project and work to create a perfect solution. The first approach works occasionally and randomly. The second approach works more frequently, but provides no guarantees.

Just like the competitors in the game WITWICS, the best way to determine how to find the right solution for each area is to focus on those factors that make each location unique. Some locations have already broadly adopted, and have a basic understanding of, equity compensation. These locations often have accessible survey data that is used by your international competitors to determine grant sizes. Other locations still see equity as a novelty. Small amounts may work as an avenue to begin their education. Still other areas do not value equity much at all. No matter what your philosophy is, a better strategy may be to offer a different form of compensation. Lastly, people in some regions are simply not paid enough for equity compensation to work well at all. If you decide to give people a nominal grant of 2% of their annual pay and your stock is trading at $200, you may have problems with someone who makes less than $20,000. Imagine giving that person 2 shares that vest over 4 years. Even the best communication can’t make sense of that!

Craft the plan to meet your people’s needs and locations. Don’t force your people to meet the needs of a tidy little plan and philosophy just to make your own life easier. Remember that every location is as unique as the one where your office is located. Every group of people have a set of desires and drivers as targeted as those sitting in the building around you. If you structure your plan to meet your locations you may find that it works as you had hoped. Otherwise expect surprises (and not the pleasant type.)

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation” and “Beyond Stock Options.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter @Performensation and @SayOnPay

Comments

[Jacque Vilet]

Hi Dan --- thanks. Somehow I knew would pick this route. It makes the most sense but it is the toughest one to design and communicate. Plus top management always wsnts "easy".

Just to add something ---- in some European countries it is not even worth having a stock option plan because of the high taxes. You don't get a bang for it ---- just barely a whimper.

[Dan Walter]

Thanks Jacque

Having been down this route with clients numerous times, the best path chose itself. While the more complex and granular solution seems more difficult, in fact it is easier over the long run.

It's easier because it works.

I do agree on your comment regarding some European countries. Equity CAN work anywhere, but often it is not the BEST solution for everywhere.

[Howard Nizewitz]

you can add to your list the issue of different tax treatments on awards by location

[Dan Walter]

Thanks Howard,

You are absolutely correct. Income and tax issues are some of the most complex and most important issues to address in global equity compensation.

Properly crafting awards to take advantage of local income and tax rules (or avoiding the onerous ones) can make global equity compensation more desirable and understandable to participants. It can also provide the additional benefit of the company possibly using less shares to deliver more value.