What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?
It is unlikely that significant changes will be made in 2019 to the US tax treatment of incentives given that proposals made in 2017 were not adopted as part of the tax reform enacted effective for 2018 and given the anticipated “grid-lock” in the US Congress following the late 2018 elections.
Environmental, Social and Governance (“ESG”) considerations may begin to take centre stage for compensation committee consideration. For example, it is expected that US public companies will increasingly tie a portion of senior executive pay to achievement of gender diversity goals.
Proxy advisory firms such as ISS and Glass Lewis will continue to press for changes in plan design and operations, but their efforts may be stifled somewhat if the SEC continues to push-back on institutional investors’ reliance on such firms voting recommendations.
The new administration is focused on guaranteeing the freedom of association and union democracy, therefore, we do not expect that there will be any affectation on operating incentive plans in the following 12 months.
Legislative reforms that could affect incentive plans are difficult to anticipate, since changes in various fields may potentially have an impact on them (such as tax reforms, regulatory capital markets changes, etc.).
Strictly from a Romanian employment law standpoint, changes could occur in case trade unions are granted extended powers compared to their current ones and incentives appear on the agenda of collective negotiations (employee benefits being always a top priority for negotiations of collective labour bargaining agreements).
There is a proposed amendment regarding the 7P Scheme, which is expected to be passed in the end of 2018 or begin of 2019 after which it must also be approved by EU. If the amendment is passed, the 7P Scheme will apply for 50% of the salary for newly started businesses.
Currently, there are several debates regarding the amendment of labor legislation. Since it is a particularly protective Labor Code favoring workers, the reforms ascribe greater flexibility for hiring workers.
As far as incentive plans are concerned, however, they are agreed by the parties. Therefore, in principle, there is no reform in the pipeline that could affect the operation of incentive plans.
Individual Income Tax Law of the People's Republic of China was revised and adopted in 2018 and the tax payment method was adjusted, which shall bring enormous effect on the taxation treatment of the incentive plan.
In next years the box 1 top rate will go down to 49.5% in 2021, the box 2 rate will go up to 26.9% in 2021. Hence, the difference in effective taxation between both boxes will diminish (which is relevant for lucrative interests).
The Dutch Civil Code contains a limitative number of reasonable grounds for the termination of employment agreements. There is a legislative proposal that will introduce a new reasonable ground that allows employers to terminate the employment agreement if the criteria for two reasonable grounds (e.g. underperformance and a disturbed employment relationship) are not fully met but taken together give rise to this new ‘combination ground’. This will have several effects on incentive plans:
- The good leaver / bad leaver arrangement in the Netherlands typically refer to the currently eight reasonable grounds. When this new combination ground will become effective, reference need also to be made to the new ninth reasonable ground.
- This ‘combination ground’ will allow employers to be able to terminate an employment agreement more easily which may result in a decrease of fair compensations that are granted. As the (missing out of) awards are taken into account when determining the fair compensation, this is a development we should carefully monitor.
There are currently 2 different legislative bills seeking to modify certain aspects of the incentive plans taxation, as follows:
i. At the Chamber of Deputies, legislative bill n° 286/2015 intends to amend the Consolidation of Labor Laws (“CLT”) in order to establish that Stock Options can have either a commercial nature – when the willingness and burden are present – or a compensation one.
ii. At the Senate, legislative bill n° 306/2014 intends to modify Law n° 8,212/1991, in order to provide for the Social Security Contribution exemption upon stock options plans.
Recently, Japanese government has shown proactive behavior to strengthen corporate governance. In 2018, the Corporate Governance Code issued by Japan Exchange Group (self-regulatory organization) was revised and the requirements related to the transparency of holders of shares were increased. Furthermore, due to reform of the tax law in 2017, a tax privilege can be granted to the remuneration of officers when the calculation is linked to the company’s performance. Given these trends, it is likely that the companies will consider more seriously the implementation of incentive plans, including the granting of stock to employees and/or officers.
Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain right of shareholders in listed companies is expected to be implemented in Norwegian law spring 2019. However, it is not likely that the implementation will affect the operation of incentive plans directly.
Brexit - The terms of the UK's exit from the EU remain unclear. The key areas that may have an impact on incentive plans include: (i) securities laws in relation to the publication of prospectuses; (ii) data protection in relation to share plans that operate across the EU; (iii) share dealing governed by the EU market abuse regulation and (iv) cross border social security arrangements.
Gender Pay Gap Reporting – Under the Gender Pay Gap Regulations which came into force in April 2017, companies with more than 250 employees are required to publish an annual report on the gender pay gap in their organisation. Among other information the report must include details of the company's general bonus gap. In the calculation of this ratio any taxable remuneration received through incentive plans will count as "bonus pay".
The International Accounting Standards Board (IASB, responsible for the applicable IFRSs) has published a Discussion Paper (June 2018) on how companies issuing financial instruments should classify them in their financial statements for public comment. It remains to be seen which changes will result for the accounting of employee share option plans.
A bill to expand, encourage and simplify employee share ownership in public and private companies is currently under discussion (so-called “PACTE” – Action Plan for Business Growth and Transformation). Its main purpose is to promote collective schemes (profit-sharing, incentive schemes, savings plans) rather than individual schemes (such as stock-option plans and/or free shares). This bill should be adopted in the first half of 2019.
Although legal regulation of employee incentive plans would be advisable, presently only general practice or some case law emerging from claims brought by employees serves as guidance.
In relation to current legal reforms with implications in the incentive plans, it is worth mentioning that from a tax standpoint, in January 2019 the Spanish Government has sent the draft of 2019 Budget Act to the Congress for debate and approval. As for Personal Income Tax, among others, the Budget increases the tax rates for salary income up to 47% over €130,000 and 49% over €300,000, as well as a 27% increased rate for savings income (e.g. dividends and capital gains) over €140,000.
Due to legislative timeframes in Colombia, current proposals of reform will not make any significant changes within the following 12 months, yet, the following are topics that are being discusses and could affect the operation of incentive plans in the future:
a) Specifications regarding the mandatory family day (two times per year).
b) Promotion of entrepreneurships and start-ups.
c) Creation by employers of mandatory lactation rooms for their employees.
The tax regime and its constraints are likely to continue their influential role on how remuneration schemes are designed, particularly with regard to executives. Considering the high tax burden in Portugal, any changes in income taxes of both individuals and companies will certainly influence how remuneration schemes are organised. However, at the moment, there are no relevant reforms announced in this field.
The increasing pay gap between executives and workers in general, especially in large companies, has been making the headlines for the past few months. In view of that, one of the political parties that support the present government has announced the intention to propose legislation that would penalise the companies, either public or private, when the abovementioned pay wage exceeds a certain limit. However, so far those measures weren’t proposed and it is not expected that such legislation ever sees the light of day.
Incentive plans based on stock option have not been implemented on a large scale. Only providing new and more favourable legislation an increase could be expected over the next year.
However, there are currently no proposals in place on issues relating to incentive schemes. Considering the recent evolution of the legislation, it is reasonable to expect that law-makers will intervene again on the subject of performance bonuses and company welfare in order to better respond to the needs of companies and employees with a view to lightening the so-called tax wedge, i.e. aimed at reducing the difference between labor cost on the company and each employee’s net gain.
There are provisions regarding stock options of employees envisaged to be in force in the future in the draft Income Tax Law. These provisions include stock options and stock purchase plans for employees also under the broad definition of salary eliminating doubts regarding them. Draft law also foresees when the employees deem acquired the stocks or options if they are granted with such incentives; amount to be taxed.