Employee stock options with or without borders?

Employee stock option plans (ESOs) are among the most common structures for companies looking to boost their compensation package and motivate their teams with an equity element. And at least from a Finnish perspective ESOs can be quite straight forward. As an employee, you are granted stock options and maybe there is an upside in the future or not. And of course, this works the same regardless of where in the world the employee is, or does it?

Global workforce presents new challenges related to employee equity. Taxation is still largely a local matter and especially the rules around ESOs and other equity structures can vary significantly in different countries. Companies need to understand all the different tax implications and reporting obligations for both the company and employees. The variance in taxation can significantly impact the attractiveness of stock options as part of the compensation package. And even if the reward amounts might not be material, non-compliance with reporting and other administrative obligations can result in costly processes afterwards.

In addition to taxation, companies growing internationally must navigate other complex legal frameworks to ensure compliance of their ESOs, for instance with securities and labor laws in each jurisdiction. Also, the application of different accounting standards (for instance IFRS and local GAAP) can be challenging due to their complexity and potential impact on financial reporting. In some cases, you have to accept that a local plan or amendments for local tax or compliance reasons are required.

Cultural differences around ESOs should also be considered when working with people around the world. In some countries, employees may be more accustomed to equity-based compensation, while in others, they may prefer cash incentives. As with any incentive structure, communication is always key. Educating employees about the ESOs and the associated benefits and risks is crucial, especially in international settings where cultural and language barriers may exist. Clear and effective communication can help foster employee understanding and appreciation of equity-based compensation.

Understanding the additional administrative burden associated with having an international equity plan can help to start developing necessary processes early. International growth companies need robust systems and processes in place to track grants, exercise dates, and tax withholdings for employees in different countries.

Fortunately, all the challenges described above can be managed and ESOs can provide a flexible and efficient part of employees' total compensation at the same time conserving cash, aligning employee and shareholder interests, and creating an ownership culture where employees feel a sense of pride and responsibility for the company's success.

In a perfect world you would have an equity plan that works in multiple jurisdictions already before having any employees abroad. If that feels unattainable, at least a proactive approach is needed to develop your plan and processes from tax and other compliance point of views when growing internationally to minimize the risk of cumbersome tax and admin issues with ESOs at a later stage, and eventually negative effects to the employees, the very people the equity incentive story was intended to motivate and inspire.