Employee Stock Plans Interface
Recommendation, 2007 April 15
Editors:
Bill Kerr, Oracle Corporation
Authors:
Daniela Goerke, SAP AG
Andreas Bold, SAP AG
Bill Kerr, Oracle Corporation
Nancy Mesereau, Transcentive
Dave Griffin, Transcentive
Evelyn Fuchs, Authoria
Peter Howells, Howells Associates
Martin Blaschek, Commerzbank
Contributors:
Members of Employee Stock Plans workgroup
Copyright © 2007 HR-XML Consortium, Inc.
Abstract
The HR-XML Employee Share Plans Workgroup has produced a simple, flexible definition of the elements required to exchange data related to the administration of employee share plans. This document describes those elements, their expect usage, and the business processes meant to be supported.
Table of Contents
1.3.2 Items Within the Design Scope
1.3.3 Items Outside of Design Scope
1.5 Example Plan Types in Detail
1.5.1 US-Style Stock Option and Stock Purchase Plans. 7
1.6 Common Employee Stock Plan Terminology
2 Process Flow – Stock Options
2.1.1 Overview Activity Diagram
2.2 Processes: Implement / Maintain Plan – Setup Plan – Setup Plan Reserves
2.2.2 Business Goal and Process
2.3.2 Business Goal and Process
2.4 Processes: Setup / Maintain Grants – Administer Grants – Register Grant
2.4.2 Business Goal and Process
2.5 Process: Posting Participant Life Events Changes
2.5.2 Business Goal and Process
2.6.2 Business Goals and Process
3 Process Flow – Employee Stock Purchase Plans
3.1 Processes: Implement / Maintain Stock Purchase Plan
3.1.2 Business Goal and Process
3.3 Processes: Employee Contributions, specifying and collecting
3.3.2 Business Goal and Process
3.4.2 Business Goal and Process
3.5 Processes: Employee Stock Sale. 25
3.5.2 Business Goal and Process
4 Schema and Field Descriptions
4.1.2 Schema Elements Explained
4.2 Schema: StockPlanParticipant
4.2.2 Schema Elements Explained
4.3.2 Schema Elements Explained
4.4.2 Schema Elements Explained
4.5 Schema: Exercise Confirmation
4.5.2 Schema Elements Explained
4.6.2 Schema Elements Explained
4.7 Schema: Stock Sale Confirmation. 53
4.7.2 Schema Elements Explained
4.8.2 Schema Elements Explained
4.9 Schema: RemoveStockPlanParticipants
4.9.2 Schema Elements Explained
4.10.2 Schema Elements Explained
4.11 Schema: RemoveExerciseRequests. 58
4.11.2 Schema Elements Explained
4.12 Schema: RemoveExerciseConfirmations
4.12.2 Schema Elements Explained
4.13 Schema: RemoveStockDeposits
4.13.2 Schema Elements Explained
4.14 Schema: RemoveStockSaleConfirmations
4.14.2 Schema Elements Explained
5 Implementation Considerations
7 Appendix A - Document Version History
8 Appendix B – Related Documents
9 Appendix C – Reference Examples
9.1.2 Example for StockPlanParticipant
9.1.4 Example for ExerciseRequest
9.1.5 Example for ExerciseConfirmation
9.1.6 Example for RemoveStockPlans
9.1.7 Example for RemoveStockPlanParticipants
9.1.8 Example for RemoveGrants
9.1.9 Example for RemoveExerciseRequests
9.1.10 Example for RemoveExerciseConfirmations
9.2.2 Example for StockPlanParticipant
9.2.4 Example for ExerciseRequest
9.2.5 Example for ExerciseConfirmation
9.3.4 Employee Stock SaleConfirmation
1 Overview
1.1 Objective
This specification is intended to support data interchange for Stock Option programs and Employee Stock Purchase Plans (ESPP). Extensive use is made of other schema defined by the Payroll work group to enable the transfer of deduction instructions and a record of the actual values deducted from payroll. The enrollment schema has also been extended into order to contain ESPP enrollments. The standard is defined as global in scope and incorporates the ability to include country specific extensions.
1.1.1 Domain Issues
The use of equity compensation plans, also known as stock plans, has grown widely around the world in recent years, with stock plans growing in number and complexity. Differing jurisdictional compliance requirements—tax, legal, accounting—pose special challenges for global plans. At the same time, advances in web technology permit access to and transfer of stock plan data by employees, stock plan administrators, brokers, bankers, transfer agents, and many other players involved in stock plan management. This widespread need for movement of and access to stock plan data has driven a need for technology standards for defining stock plan data.
1.1.2 Business Reasons
An industry standard vocabulary to describe employee share plan transactions provides the means for all stakeholders to send and receive such transmissions to/from multiple sources without having to establish, engineer, and implement many separate translation mechanisms. The ability to quickly and cost effectively accept data from new sources allows the efficiencies promised by the Internet and its applications to be realized. [examples – speed with regard to volatility of stock price, real time modeling and transactions]
1.2 Design Requirements
The final design will be flexible enough to exchange employee stock plan data in a manner suitable for use by all the involved parties. The design will be broad enough to be used globally, and will contain the elements required to express a wide variety of share plan transactions.
1.3 Scope
The scope of the project is to define an interface that can be used between an employer, the plan administrator and a broker to exchange stock option and ESPP data. To attract and retain employees, many employers offer employee stock plans. These plans reward their employees with stock options and offer employees the opportunity to purchase stock at a favorable price through an ESPP.
1.3.1 Major Components
Seven major schemas to describe the data exchange between all players involved in the process have been defined. In addition the Enrollment schema has been updated to pass information about participant enrolled into an ESPP scheme. The schema and their indicated usage for Stock Options and ESPP are as follows:
|
Schema |
Stock Option |
ESPP |
Stock Workgroup Schema |
|
Stock Plan |
Yes |
Yes |
Yes |
|
StockPlanParticipant |
Yes |
Yes |
Yes |
|
Grant |
Yes |
No |
Yes |
|
ExerciseRequest |
Yes |
No |
Yes |
|
ExerciseConfirmation |
Yes |
No |
Yes |
|
StockDeposit |
No |
Yes |
Yes |
|
StockSaleConfirmation |
No |
Yes |
Yes |
|
Enrollment |
No |
Yes |
No |
|
PayrollInstructions |
No |
Yes |
No |
|
PayrollBenefit Contributions |
No |
Yes |
No |
In addition schemas to delete data, which has already been sent, have also been defined. The schemas are:
|
Schema |
Stock Option |
Stock Purchase |
|
RemoveStockPlan |
Yes |
Yes |
|
RemoveStockPlanParticipant |
Yes |
Yes |
|
RemoveGrant |
Yes |
No |
|
RemoveExerciseRequest |
Yes |
No |
|
RemoveExerciseConfirmation |
Yes |
No |
|
RemoveStockDeposit |
No |
Yes |
|
StockSaleConfirmation |
No |
Yes |
1.3.2 Items Within the Design Scope
The scope of this document includes only elements and attributes for data exchanged in the administration of and transactions associated with employee stock option plans. (Please see section 3.2 for a complete description of elements and attributes) and Employee Stock Purchase Plans
1.3.3 Items Outside of Design Scope
1)
Communication of plan rules (eligibility, status changes)
Rules can be very complex and may vary considerably from plan to plan and
within different legal and tax jurisdictions. Therefore the schema described
here do not contain the rules themselves but simply the data. It is
assumed that the stakeholders in the stock plan administration process will
apply and act upon the appropriate rules as needed following the exchange of
data. However some simple rules such as blackout information are included.
2)
Exchange of Company data
A separate workgroup within the HR-XML Consortium has been initiated to define a
common schema for company data. We would like to make use of this schema once
it is completed. Therefore we decided not to define a Company schema within the
stock workgroup.
3)
Support of plans containing different underlying stock
Currently, plans with more than one underlying stock, e.g. a company issues in
a year the same number of options for ordinary shares and preferred shares, are
not able to be supported. When exercising, the participant must also
exercise the equal number of ordinary shares and preferred shares.
1.4 Definition of Roles
The roles related to the operation of employee stock plans are:
Company: The organization responsible for sponsoring the employee stock plan and whose shares are offered through the plan. Each individual company’s plan has its own rules for the issuance and administration of stock options.
Administrator: The organization responsible for maintaining plan data, facilitating transactions, and enforcing plan rules. The role of the Administrator can be held by the Company, the Broker, or a third-party.
Participant: An individual, usually an employee of the Company but sometimes possibly an outside consultant, board member, independent contractor or a beneficiary - who stands to become an equity owner or otherwise benefit financially through plan participation.
Payroll: The organization responsible for process the payroll of the company
Broker: A company that buys or sells securities on behalf of the Participant or Company
Transfer Agent: An institution selected by the Company to issue and transfer share certificates that represent ownership in the company.
Trustee: An institution selected by the Company to hold the shares reserved for issuance through the stock plan.
In many cases one business entity represents several roles, e.g. Administrator and Broker are very often combined and performed by a Bank.
1.5 Example Plan Types in Detail
1.5.1 US-Style Stock Option and Stock Purchase Plans
Stock Options
§ Incentive Stock Option (ISO) - Qualified grant type typically used in broad-based plans by US-based companies. Qualified stock options can only be awarded to employees of the company. Stock options that meet US Internal Revenue Code Section 422(b) requirements qualify for preferential tax treatment (per US Internal Revenue Code Section 421). Employees are not taxed at the time of grant or exercise. Taxation occurs at disposition and varies based on holding period. Preferential tax treatment is available if shares are not disposed of prior to the required holding periods (one year from date of exercise and two years from date of grant) being satisfied. If holding periods are met, all gain over exercise price is taxed at the more favorable capital gains rate. If shares are disposed of prior to the end of the required holding period, a “disqualifying disposition” occurs and the gain is taxed at the less favorable ordinary income tax rate. Subsequent gains (losses) are taxed as capital gains (losses). Employer may take a deduction equal to the amount of the disqualifying disposition. Employer is not required to withhold income taxes on ISOs, even in the event of a disqualifying disposition. (Proposed changes to the withholding requirements on ISOs are being debated; the discussion is ongoing). ISO $100K rule: No more than $100,000 (valued at grant) of ISO shares becoming exercisable in a single calendar year may receive preferential tax treatment. ISO shares exceeding this limit will be taxed as NQSO shares (see below).
§ Non-Qualified Stock Option (NQ or NQSO) - Typically used in broad-based plans. Generic stock option with no preferential tax treatment or limits on grant. May be issued to employees and non-employees (consultants, directors and other service providers). No taxation at the time of grant. The spread between exercise price and fair market value on the date of exercise is taxed as ordinary income. Employer must withhold taxes. Subsequent gains (losses) are treated as capital gains (losses). Employer may be able to take tax deduction on the spread.
§ Restricted Stock Option - A stock option for shares whereby upon exercise, the participant receives unvested shares and is restricted from transferring or selling the shares until the shares vest (usually according to a time-based vesting schedule). Taxation occurs at vesting (when restrictions “lapse”) on the spread between option price and fair market value on the date of vesting or on the spread at exercise if an 83b election (per Section 83b of the IRS code) is filed within 30 days of exercise. “Early exercise” programs (common in high-tech industries) in the US typically permit immediate exercise of unvested ISO or NQSO shares, enabling participants to file an 83b election and fix the tax on the spread at exercise rather than the spread at the time the shares vest. Participant forfeits unvested shares at the time employment is terminated. Shares are held in escrow until they vest.
§ Restricted Stock Award - An outright issuance to the participant of restricted shares, usually at zero price or at a significant discount to fair market value. Shares are held in escrow until they vest. The vesting event is often performance-related—a certain share price or other performance trigger is reached. Taxation is the same as for restricted options—on the spread between exercise price and fair market value at the time the restrictions lapse or at the time of exercise if an 83b election is filed. In the past, restricted stock awards were typically limited to executives, but many US-based companies are broadening their use of restricted awards and options, as they are seen as being more of a true performance-based incentive than other types of equity compensation.
- Stock Appreciation Right (SAR)
An award paid in cash or shares that gives the employee the appreciation on the stock from the time of award to the exercise date. When granted in tandem with options, the exercise of the stock-appreciation right cancels the option. Stock appreciation rights are similar to phantom stock options. Types of SAR plans are:
- Standalone SAR: Also called Freestanding SAR. The holder receives the amount by which the share price has appreciated from the grant date to the exercise date based on the number of “phantom” shares awarded. Employer must withhold taxes on gain (as ordinary income) at time of exercise.
- Tandem SAR: At exercise, the participant may elect to receive either the appreciated value of stock (in cash) or the shares themselves. Employer must withhold taxes on gain (as ordinary income) at time of exercise.
- Additive SAR: Appreciation rights granted in addition to an option. Exercising the option typically triggers the SAR and are paid simultaneously. Unlike the Tandem SAR where the exercise of one cancels the other. Typically used to offset taxes. Both standalone and tandem SARs must be treated as an expense by the granting company. SARs are no longer widely used in the US.
§ Phantom Stock/Performance Units - Similar to SARs in that they provide deferred or incentive compensation to employees. A share or unit of phantom stock is equal to the fair market value of a share of the company’s common stock or to a value derived using a valuation method. Payments of phantom stock are usually made at termination of employment, attainment of a certain age by the participant, or after a fixed term of years. Payment to the participant may be the full value of the phantom stock or the amount of appreciation that occurs after the employee receives the phantom stock right. Phantom stocks plans vary widely in their terms.
Stock Purchase Plans
- Qualified Employee Stock Purchase Plan (Section 423 Plan) - Qualified plan type (terms defined by Section 423 of the IRS code) used in broad-based plans by US-based companies. Participants must be employees of the company. Participants typically make regular payroll contributions for a specified offering period, after which a purchase is made. A plan might be offered for 24 months, with “exercise” or purchase periods every six months. Purchase price may not be less than the lesser of 85% of fair market value either at 1) beginning of offering period or 2) time of purchase, effectively giving employees a 15% discount on the shares. Similar to ISO plans, 423 qualified plans require the participant to hold the shares for one year following date of purchase and two years following start date for offering period to take advantage of favorable tax rates. Otherwise, a disqualifying disposition occurs and income is taxed at higher ordinary income rates. Employer may take a deduction equal to the amount of the disqualifying disposition.
ESPP $25K rule: No more than $25,000 (valued at the beginning of the offering period) of shares may be purchased by a single employee for each calendar year in which the option to purchase is outstanding.
- Non-Qualified Employee Stock Purchase Plan - A generic stock purchase plan with no favored tax treatment under US law. The spread between purchase price and fair market value on the date of purchase is taxed as ordinary income. Employer must withhold taxes. Subsequent gain (loss) treated as capital gain (or loss).
1.5.2 UK Share Scheme types
Approved - In the UK a number of plans – if approved by the Inland Revenue as meeting strict legislated conditions – enjoy tax relief.
- SIP (Share Incentive Plan, previously AESOP - All Employee Share Ownership Plan). A fairly new, complex plan allowing various possible components of stock purchase and stock incentive (but not options). Applicable to all employees.
- ShareSave or SAYE Plan. A well established all employee plan with regular savings building to give a sum which can be applied to exercise an option.
- ESOS or ESOP commonly referred to as Executive Share/Stock Option Scheme/Plan, sometimes called a Discretionary Plan. In the UK when Approved by the Inland Revenue, these are strictly termed a CSOP (Company Share Option Plan).
Unapproved - Frequently schemes are set up for executives which are not approved by the Revenue and thus carry no income tax relief. The Approved/Unapproved distinction is a similar concept in some ways to the ISO and NQ status in the US. (Occasionally, but rarely, there are unapproved all employee schemes).
§ ESOS. Typically a more generous grant of options than under the approved version, or with options granted to non-UK residents.
- LTIP (Long Term Incentive Plan). Commonly the award of a potential allocation of shares (often held in trust in anticipation of vesting) for release by allotment or transfer dependent on performance achievement.
- RSP (Restricted Share Plan). Similar to LTIP, but different in that shares are allocated to individuals, subject to possible forfeiture if performance is not achieved.
- While approved schemes must follow a relatively rigid structure so that ShareSave schemes are similar for every company, unapproved schemes are limited in their complexity and variety only by the imagination of the benefit.
1.5.3 German Share Plans
Stock Option Plans:
o Current option plans often involve performance hurdles that have to be met, in order for the participant to exercise options. Performance hurdles can be a rise in share price, the out performance of indices or other shares, internal scores or any combination. Before exercising options, the participant has to hold the options for at least two years. The typical runtime for options plans is 6-8 years. The necessary shares are either bought back by the emitting company or are created through what is called a “conditional raise of capital” (bedingte Kapitalerhöhung). In the later case, options cannot be sold immediately but must be paid for by the participant before they are sold. A cashless exercise is often impossible since most stock option plans use the conditional capital raise as an instrument for generating shares. Sometimes, the participant has to make an investment in company shares in order to receive company shares. Some companies allow Cash Settlement where the participant receives money instead of shares.
o Convertible Bonds are a special type of option plans. The difference is that convertible bonds can be can be traded. However the share price (grant price) must be reduced.
Phantom Stock Plans
- Phantom Stock Plans do not offer shares but rather the difference in money between the strike price and the base price calculated at the beginning of the phantom stock plan. The participant often receives the amount due with regular wages. Phantom Stock Plans are less regulated than real stock option plans but the costs are P&L-relevant for the emitting company.
Employee Shares (Belegschaftsaktien)
o Employee Shares are typical offered to a wider group of employees. The employee buys a certain number of shares at a discount rate or receives shares for free when buying company stock. For taxation reasons, employee shares are usually blocked for a certain time.
Employee Shares + Quarterly Fonds-Plan:
o The employee buys a certain number of shares once a year. Some high level employees might be allowed to invest quarterly in special fonds. If the investment exceed a certain amount, the participant receives a specified number of shares.
1.6 Common Employee Stock Plan Terminology
The following terms are typical for the US and the UK. Specific terms to a country will be identified accordingly.
Capital Gain (Loss): Profit (or loss) from the sale of a capital asset, such as a share of stock. In the US, capital gains may be short-term (held 12 months or less) or long-term (held more than 12 months). Capital losses are used to offset capital gains to establish a net position for tax purposes.
Cashless Exercise: Generally the same as a same-day sale. A transaction in which an optionee exercises a stock option and simultaneously sells the shares, with all or a portion of the sale proceeds delivered to the Company by a broker to pay the exercise price. The balance goes to the optionee. See also “Same-Day Sale.”
Commission: A broker’s fee for handling securities transactions for a client in an agency capacity.
Common Stock: Securities which represent an ownership interest in the Company.
Confirmation of Exercise: A statement containing details relating to the exercise of a stock option. The Administrator gives this statement to the optionee at the time of exercise. The optionee should retain it for tax purposes.
Cost to Exercise: The amount a participant or option holder must pay to exercise a stock option.
Disqualifying Disposition: (Incentive Stock Option) A sale or disposition of ISO shares prior to the required holding period of two years from the grant date or one year from the exercise date, thereby disqualifying the resulting gain from special tax treatment under US law. Upon a disqualifying disposition, the employee recognizes taxable income and the Company is entitled to claim a deduction equal to the difference between the option price and the fair market value on the exercise date or sale price, whichever is lower. See Incentive Stock Option below.
ESPP: Employee Stock Purchase Plans. See terminology for Stock Purchase Plans.
Exercise: A transaction in which the participant or optionee exercises the option to purchase Company stock.
Exercise Date: The date on which the option is excercised
Expiration Date: In the context of stock options, the last date on which the participant may exercise the option to purchase shares.
Employee Share: (Germany “Belegschaftsaktie”) Stock given to the employee at a discounted price. Employee shares are used to allow employees to participate on their employer’s profit or loss. Employee Shares are typically locked for a certain number of years before they can be sold.
Fair Market Value(FMV): The price at which the stock would change hands between a willing buyer and a willing seller. For purposes of an employee stock plan, this is usually the closing price if the stock is traded on a major exchange, or the average of the bid and ask price if the stock is traded over-the-counter. For privately held corp