Employee stock plans: What growing companies need to consider

1 May 2024
Companies of all sizes use employee stock plans to attract and retain top talent. Given the rise of remote work and fierce global competition, stock plans in many countries are an expected part of compensation packages, even by mid-level employees.

We’ve addressed stock plan types — from stock option plans to restricted stock plans to phantom stock plans and more — and how to get the most out of them in another article. Since that was published, we’ve noticed an increasingly common problem: many fast-growing companies in tech and other sectors have introduced stock plans without much planning or oversight, often in multiple countries, which can lead to significant compliance risks.

This article addresses what fast-growing companies that have implemented stock plans — and early-stage companies that are looking to implement plans — should consider to lower their organisational risks.

Implementing stock plans by degrees: A typical scenario

Startups and other growing companies almost by definition don’t have experience with or much interest in those elements of their businesses that don’t relate to their core missions, and they commonly downplay compliance risks. Facebook’s early motto, “Move fast and break things,” perfectly reflects this lack of concern for risk. Moving fast and breaking things worked well in the very early stages of Facebook, but the company sensibly moved on from that creed and started to prioritise compliance following numerous fines, including a $5 billion penalty in 2019 from the US Federal Trade Commission for privacy violations.

Of course, Facebook is an extreme example of growth and risk, but the scenario of a company growing quickly and taking on an increasing amount of risk without properly understanding and managing it is a common one. This includes implementing stock plans.

Let’s take a California tech company as an example. In its very early stages, the company may not consider stock options, or it may consider them only for high-level US-based employees. In its later stages, the company expands its global footprint. It establishes a legal entity in China and opens a sales and marketing office there. It also hires coders in Poland through an employer of record. Finally, it sends a US-based employee on an expat assignment to help run the China office.

Over time, the company comes to believe that, to compete for talent, it must offer a stock plan as part of its compensation packages. It initially rolls out a stock plan to its US-based employees with the help of a US-based law firm. It assumes it can roll out a similar plan to employees in its China office, and to the employees that it’s paying through the EOR in Poland. It does not consider the ramifications for its expat employee in China.

The importance of thinking globally

Like many startups everywhere, our California tech company has failed to account for the complexities of cross-border operations. Each country has its own rules related to stock options, and these can vary considerably by jurisdiction. These discrepancies help explain why granting stock options to expatriate employees is a notoriously complex area of compliance.

For its China operations, our California tech company must understand how the rewards are taxed in both the US and locally (including any social security obligations), and follow each jurisdiction’s rules. For China, those local rules can be complex and extend to additional local tax bureau filings which can apply at implementation or grant or share issuance. The company will also need to consider how tax treaties between the US and China affect the expat employee’s taxes.

These tax and social security considerations are standard considerations, even if understanding and following the related rules can be difficult in practice. There are, however, other rules our California company must account for in China. The company may, for example, need to establish an approved China onshore account and complete local filings to send money outside the country, or to receive funds from outside the country, in relation to any stock plan transactions.

“Each country has its own ‘gotchas’ when it comes to stock plans,” warns Bill Kirwan, vice president, advisory for Vistra in the UK. “In India, for example, you need to have your stock valuation affirmed by a locally recognised merchant bank — unless you’re listed, which is rare for a company in its early stages. To take another example, in the UK, there should be no social security or payroll obligation if stock shares aren’t tradeable. Unfortunately, what constitutes a tradeable stock per UK authorities isn’t always clear and obvious. I had a client that had to settle unpaid payroll taxes for over £100,000 because what they considered tradeable was different from what UK authorities deemed tradeable.”

Kirwan emphasises the importance of understanding the jurisdictional obligations and risks when offering stock plans to employees in a global company. He also points out that some decisions a company will make related to stock plans may slide into the realm of human resources. It’s critical, for example, to clearly communicate stock plan information to employees, including whether the plan is discretionary or non-discretionary. You’ll also want to document those communications.

“You don't want disgruntled ex-employees claiming they should have been participating in the stock plan, but it wasn’t made clear to them that the plan was discretionary as opposed to an all-employee plan. This is a particularly important consideration in many European countries, which have robust worker protections.”

Stock plans and employers of record

Our California-based tech startup also must address the question of stock options to its workers in Poland, who are local workers employed through an employer of record, or EOR. In our example, the tech company engages the EOR provider to be the employer of record in Poland and pay workers through its (that is, the EOR’s) locally compliant payroll, while the tech company directs and controls the workers. The EOR also provides locally compliant benefits to the workers on behalf of the tech company.

It's important to stress that EORs are not appropriate for all situations and are not intended to be a permanent solution to hiring workers in another country. Generally, EORs are used to test a market or as a stopgap solution while a company establishes its own legal entity in the target country. That said, EORs are now a popular, well-established method of hiring across borders. And companies that use them increasingly want to offer their EOR-engaged workers stock plans.

Offering stock plans through an EOR is an evolving area. Just a few years ago, many EORs simply refused to get involved in stock plans due to the risks, obligations and administrative complexities. The EOR provider is, after all, technically the local employer of the workers in question, creating a layer between the client (in our case, the tech company) and the workers (the Poland-based coders). Many EORs understandably don’t want to assume any related compliance risks, nor do they want to take on the administrative burdens of managing stock plans for their clients. But given the importance that companies place on offering workers stock plans, many EOR providers have become more flexible.

Ultimately, whether or not a company can offer a stock plan to workers paid through an EOR will depend on the jurisdiction and the willingness of the EOR provider. Generally speaking, the company will have to take on the burdens of managing the stock plan (often with the help of a third-party provider), including making any local tax and other filings and working with the EOR to ensure any related payroll withholdings are implemented.

Avoiding the negatives and stressing the positives of stock plans

It’s worth emphasising that the scenarios and risks outlined in this article are real. As mentioned, we’ve noticed in recent years that many growing companies have developed and managed stock plans on a global scale without fully considering the compliance implications. Understanding and accounting for these implications can save money and administrative headaches in the long run.

Companies should also not to lose sight of just how important stock plans can be to their success.

“It is true that much of what we’ve discussed is what I call the negative side of stock plans,” Kirwan says. “This includes cross-border compliance with tax and social security rules, and adjusting payroll withholdings accurately, among other things.

“But it’s equally important to stress the positive aspects of stock plans. They’re popular — and companies are willing to take on related burdens — precisely because they offer companies and their employees so much value. There are few things in our global economy that provide a better incentive than getting stock in a growing company.”