Podcasts

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This is Own Up, the Global Shares podcast about employee ownership and equity compensation. Answering questions and sharing with industry experts, here are your hosts, Chris Dohrmann and John Bagdonas.

Chris Dohrmann 00:21

Welcome back to Own Up. In today’s episode, we’re going to be talking about PEO employees and equity rewards. And I’m joined by two experts in the field. One is Marlene Zobayan, who is a global stock plan expert and a Partner at Rutland associates. Welcome, Marlene!

Marlene Zobayan  00:37

Thank you. Thank you for having us!

Chris Dohrmann 00:40

I’m also joined by Jon F. Doyle, who is the Managing Shareholder for International Law Solutions. Welcome Jon!

Jon F. Doyle  00:47

Thank you, Chris!

Chris Dohrmann 00:50

I introduced this as PEO employees. So I’m already starting what were we in the industry are always accused of…we love our abbreviations. And we love our jargon. So I’m just going to you a little definition and say PEO stands for professional employment organization. And the focus of today’s episode is going to be on – is it right for your organization? And then we’ll talk about a couple of issues that may be the right way to get started or help you evaluate whether professional employment organizations are right for you!

So I’m going to start by asking John, because I think you receive the most questions about this. It’s an emerging topic and emerging trend. You know, how does it the conversation usually start?

Jon F. Doyle  01:30

Well, Chris, as a as a law firm, we advise clients on the tax and regulatory issues of offering equity, you know, around the world. So you know, we really get involved in this. And typically what happens is, a client will contact us and say, hey, we want to offer equity to someone new or in certain countries. And that’s where the discussion starts. And the first couple of things that we want to understand are well, what are they offering? What type of equity? Is it options? RSUs ESPP?  What countries are they offering in?

And then the next question, which really leads right into our topic today is – what type of workers are getting the awards? Are they employees of the subsidiary or affiliate? Are they contractors? Or are they folks with a third party such as a professional employer organization? And that’s really kind of how we start this. And it’s important to literally defy from the beginning what type of arrangement it is, because as Marlene and I explain today, that’s going to make a big difference on the taxes and some of the regulatory issues. So that’s a very critical thing that we have to figure out.

In terms of professional employer organization, the question is, what is it? And that’s an ongoing debate in terms of what it is. And in all candor, it really depends!  It depends on the country. And it depends on the specific arrangement. But generally speaking, it’s a third party that provides payroll and other HR services to a company – and the issuer company’s employees. So the issuer can use the PEO to help with engaging people in other countries.

Chris Dohrmann 03:21

So when I refer to it as a solution or a vendor solution or a partner solution for companies that are looking to address what amounts to the global labor shortage, and it’s one way to make sure that they can start to engage with the labor market in a way that may be easier for them in certain situations. Would I be wrong in clarifying it like that?

Jon F. Doyle 03:47

No you’re absolutely right, Chris. And, you know, these have become really popular for a lot of reasons. But one of the reasons is just as you explained, you know, we get calls a lot from clients that are like we have, we’ve managed to find someone, an engineer or someone in a country, that the client doesn’t have any connection with otherwise. And they don’t necessarily want to establish a subsidiary or anything like that, or they, maybe can’t do it fast enough.

You know, in a lot of countries it takes time to get these subsidiaries up and running. So a PEO can really be a good quick way to get things going. And you know, one thing I should mention, Chris is, you know, as I said earlier, there’s different variations of a PEO, but the most basic one is, you know, it’s really a kind of a co-employment relationship where the PEO is providing certain HR and payroll functions, and then the issuer company is also the employer. But there’s another variation of this that gets used a lot and it’s called employer at record. And a lot of times they’re lumped together but that’s where the third party is actually the employer and the only employer. And it does everything – it employs first person, it does all the payroll and everything. And then they simply have the individual worker provide the services back to the company client or the issuer company if you will.

Chris Dohrmann 05:08

You already mentioned a couple of things that when Marlene joins the conversation in a moment, and when I guess we can wrap it around, there are really common themes here. One is, you mentioned specific countries. So we’re going to come back to the country relationship here. And the other is the fact that my background has always been in servicing employees. Then you also have other some quasi employment relationships, like board members, and sometimes contract. In this case, you’re really bringing up the differences, and highlighting the differences between employees, and what are non-employees.

Jon F. Doyle 05:44

That’s right. And to kind of back up for a second here, you know, in terms of getting those qualified workers… companies are really, they have a number of different ways they can go. They could decide that they’re going to employ the people directly, or through a sub, they could decide to engage them as contractors, or they could decide to use some variation of a PEO.

Whether it’s a co-employment arrangement, where they’re technically still employed with the company, and also employed, if you will, by the PEO, or a full on EOR, where all the employment is with the third party. And so the big thing for the client is to figure out, you know, what makes the most sense. And one of the reasons that the PEO arrangement has become so popular is the different countries around the world really, are skeptical or don’t like contract arrangements. And so frequently, clients will come to us, and they’ll want to use a contractor, but the issue becomes tax, if the individual doesn’t pay the taxes, then there’s a risk to the company. And so for this reason, a lot of folks use these PEO arrangements, because then they can be sure the taxes are getting paid in. And that’s really a very, very critical point here is to make sure they’re paid it, but yet they get the person they’re looking for to provide services to them.

Chris Dohrmann 07:11

So just to summarize, it sounds like this is an emerging solution to continuing, you know, problems situation where companies need to find qualified expert employees, and navigate the restrictions for global issues as far as whether it be country specific or be tax specific, or labor law specific, and bring those folks on. What our focus here is going to be…assume they’ve been brought on through this mechanism – is equity granted to these folks? Or can it be granted to these folks? Because obviously, you have the same retention, reward, you know, discussions, can it be granted in the same way as employees?

Jon F. Doyle  07:54

Basically, it can, and I think in most places, you know, this is a workable approach. You know, you do have to be careful, though, some of the tax considerations and as well as some of the regulatory stuff. So for instance, if you’re dealing with a country where you got to get an approval or something, it may make a difference whether or not the individual is actually somehow employed with the issuer, either directly or its subsidiary as opposed to a third party. So that can play a role. But generally speaking, Chris, it is perfectly workable, to make these grants to folks working for a third party or a PEO.

Chris Dohrmann  08:32

I don’t want to put you on the spot, Marlene, but I mean, it’s sounds like the solution for labor and to actually start to procure them. My concern, and I think we’ve had, you know, brief discussions about this. It sounds like the labor laws are catching up, or at least being proactive. Have the tax laws caught up to this arrangement?

Marlene Zobayan  08:56

No, not at all. It takes a very long time for tax authorities to ask. And quite honestly, in the last three years, when we’ve seen, in my opinion, we’ve seen the largest amount of PEO employee growth, the tax authorities have been dealing with remote workers and what to do when people are stuck in a location during the COVID pandemic. They really haven’t had a chance to even get their arms around this. And maybe I’m being a bit generous when I say that. I am a little bit jealous of John, he says that he gets the calls when companies are thinking of making the grant. I tend to be the one that gets the calls when a company says we have a PEO employee that we’ve given equity to and now he wants to exercise his stock options, how do we withhold? And now you’re trying to unravel a situation that they went into and, you know, it’s too late.

So there are lots of tax issues that come up when you’re granting to employees of this nature. The first one is, is there a withholding and reporting liability for payroll compliance? And that really depends on the country. It depends, firstly, on the country whether there is a payroll reporting withholding compliance requirement. And secondly, who has that requirement? Is it the PEO? Or is it a company? In some situations like the UK, anything an employee gets by reason of being an employee is the employers responsibility to withhold and report even if the employer is not the one providing the benefit. And there’s a lot of case law about this in the UK, primarily with Call Center employees that were given benefits by the vendor that they were making the cold call for, but they were employed by the call center. And the call center is still liable to do the withholding and the reporting. There are other countries like Canada that says, well, the issuer is the one liable even if they’re not a resident company. But if the issuer, i.e. the company in our discussion, is the one that’s liable, and they don’t have a presence, that requirement can usually be met by the PEO, who has a presence in that country whose payroll registered in that company. The issue is, will the PEO want to do that withholding and reporting? And very often they do not.

And that’s why it’s really critical in advance of making any grants to PEO employees that a company has that conversation with a PEO because it doesn’t just end with withholding and reporting. There could be other compliance requirements like John alluded to. There’s also other equity statements that might be required to be made, such as in the UK, in Australia, there’s the ESS statement that has to be done every year. And there’s a question as to who’s responsible for doing this? And who will do it? And that’s really key.

Chris Dohrmann  12:08

I don’t want to be, you know, trite, but it sounds like what you’re both bringing up is that failure to plan, you know, is going to generate, you know, a failure point at some point here. And I think you’re being both very informative about that process. It sounds like a solution more and more folks are adopting, but as long as they ask the right questions going into it, then you know forearmed is the best way to approach it.

Jon F. Doyle  12:33

We’ve definitely seen progress what Marlene is talking about where the clients aren’t clear what the PEO is going to do. And oftentimes, as Marlene was explaining, they’re like we can’t do the withholding reporting on equity. We’re seeing a little bit of a change in that, some of the companies now are getting more open to doing this. But it has really presented a lot of problems for our clients. Because, you know, just as Marlene said, they’ll show up and they’ve got an exercise or vest coming up. And they have no idea who’s going to do the withholding and reporting. And that’s an issue.

So we’ve tried when we start working with people, if they haven’t already gone too far down the road, to let them know, hey, this is going to be an issue, we recommend you first talk to the PEO, and see whether they are willing to do the withholding and reporting. If they’re not, then we can look at you know, potentially other ways to approach this. And honestly, sometimes the problem solves itself, because a lot of times the client is already in the process of trying to set up a more formal arrangement, you know, subsidiary or local entity where they’re going to eventually employ the people. And they maybe haven’t done it yet. But by the time there’s an actual taxable event, they may be able to themselves do the withholding and reporting. And, but it just depends on a number of factors. But this is the primary issue that we see is that there’s often times no assistance with those tax obligation.

Chris Dohrmann  14:06

You both mentioned something that I want to, at least highlight, or put a flag on because we can come back to it maybe at the end or in the conversations. Marlene, you talked about the trend of, you know, actually almost all employees now have had at least a discussion about whether or not they’re going to be hybrid in some way, shape or form, whether it be home or work, or whether it be from a site that’s other than their home or work. And that would probably happen in the same case for PEO employees. So the transition from PEO to mobile employees or introducing the complexity of having that happen is one thing. The other thing that you just mentioned, John is the fact that some of these PEO employees are likely to migrate to de facto employees at some point too. So it’s a good question to ask of the PEO, or at least ask of your other stakeholders when you’re in administrator in this, to make sure that those possibilities have been addressed.

Marlene Zobayan  15:05

I want to go one step back and say you’ve got to have policies when it comes to mobility. One of the reasons I think that PEOs came up isn’t just the global talent shortage. It’s also because we now have a system of working remotely or a prevalence of working remotely, where you might have had an employee that say, worked in the US, got incentive stock options, which are tax favorable in the US, and now wants to work in Peru.

And if your policy is while you can work from anywhere, and you’ll get to keep that employee, you might hire a PEO in Peru, to accommodate that employee, as opposed to letting them work directly from Peru. And there are tax issues about letting them work directly from Peru, which I’ll address in just a minute. And so now you’re sort of, the rugs been pulled under you, you already have an employee with equity that’s now in Peru that you have to deal with. And I just make Peru up, it’s actually not that difficult a country to deal with, but it could be anywhere in the world that could be more problematic from a tax and regulatory perspective. And so I think the remote working that we are looking at right now in the in the professional community is also what’s driving PEO prevalence. You also have, in that particular example, you not only have mobility, you also have an issue of this person has a qualifying stock plan that is tax qualified in the US. But it only applies to employees and PEO employees typically cannot get the tax benefits of the tax qualifying plan such as an ISO in the US. And the same is true in Israel and France. And most countries that I’ve looked at there have tax qualifying plans do not allow PEO employees to participate. When it comes to mobility, you really have to do a double research. And that’s why I always tell companies to have a policy in mind, so at least somebody doesn’t think they can just move from A to B without pre approval, without giving the company a chance to at least do their due diligence about it. Because some countries will tax non-employee stock options. And these PEO employees are not your employees at the time of grant. So you could have an individual that’s been taxed at the time of grant on their equity award and is now moving to a country that was going to tax them at the time of exercise. And they’re going to be double taxed in a way. So it is happening. It’s also happening this transition from PEO employee to full employee across the border. Those things unfortunately, require individual attention. And the answers do vary by country. I hate to keep saying that. But it’s true!

Chris Dohrmann  18:00

Well I was just going to come back to that because we were all sitting in various points of one of the countries that is the most aggressive as far as taxation and the most complicated. But you have both mentioned this. And I just wanted to say, as far as a PEO arrangement, are there some jurisdictions, some countries, some states, some provinces, that are a little bit more challenging than others? So folks can take away and say, look, at least we know that it’s going to be a little bit more difficult going in if we have to work there?

Marlene Zobayan  18:29

Chris, there are actually some countries where PEO arrangements are not allowed and PEOs do operate there. And they are under the radar. So as a corporation, it may or may not bother you. But places such as France and Spain have pulled very strict parameters around what PEOs can and can’t do and the types of roles they can fill. And sometimes, you know, the length of time that those employees can be there as opposed to an indefinite employee. So that’s definitely something I consider challenging. Having said that, I know a number of corporations that have hired PEOs in that location.

Jon F. Doyle  19:09

No, that’s a great point, Marlene, and we’ve seen that too. And I think this is where we have to get down in the weeds a bit in terms of what really is the function of the PEO. You know, are they a co-employer, you know, assisting with payroll and HR, or are they really what we would call an employer of record, a true third party, and that those factors can make a real difference. And certainly, you know, we have plenty of clients that want to offer equity in places like China. Well in China in order to be able to have people acquire equity the company has to have a local subsidiary and has to have a SAFE approval and has to be a public company.

So if the individuals are working for a third party, it’s not likely that you’re ever going to be able to get approval because they have to work for your wholly owned foreign enterprise and a third party. So there definitely are places like that. And another one that comes up occasionally where there’s some uncertainty is the Philippines. Philippines has securities rules that require you to either qualify for small exemption or to register a certain amount of shares. But our sense is that those rules would really only work if you had folks working for your local subsidiary not a third party. So there are a lot of places where there’s a bit of uncertainty. But you know, most of it can be dealt with.

And I think one of the things we probably should talk about is, because the grants are coming from the issuer, the client company, if you will, to people that work somewhere else, you oftentimes need to clarify that in some type of a side letter. And we want to be careful, because if we’re trying to have the individuals actually employed by the PEO more like an EOR arrangement, we’ve got to be careful what we’re saying and how we’re saying it.

So oftentimes, we’ll put together side letters that’ll just memorialize the fact that the individual is getting a grant from the client company, but the client company is not their employer, and it’s for services that are being provided to the third party company. And so that helps, you know, we’re always trying to ride this line. We don’t want them necessarily to be an employee of us, we’d rather they be the employee of the PEO or the EOR. And so there’s this balance that you have to strike. And then there are things like intellectual property, you know, does the PEO have sufficient agreement with the individual and make sure that they’re not going to run off the IP. So there are things like this, you have to look at, they go a little bit out of the equity, but it always seems to come up one way or another.

Chris Dohrmann 21:58

There are just a couple of final things that I wanted to address here. I recognize these from a while back from working with companies that are basically in the financial world, or primarily in the technical world, or even on the biopharmaceutical, but I can see this happening across the board in ecommerce in anything where that you may want to get specific talents from places around the world where you’re may not be able to get it in your home country. Should the arrangement with the PEO be done out of HQ? Or should these companies investigate the possibility of having at least a subsidiary or an office in the country, you know, negotiate a contract with these firms?

Jon F. Doyle  22:44

Well, in our experience, it’s typically done at the parent company level, because usually the parent company is the one that’s kind of deciding where they’re going to hire. And most of the time, there is no one local, you know, this is oftentimes the first hire for a lot of these clients. So they are like, oh, we found a software engineer, and they happen to be in Nepal, you know, or they happen to be in Bulgaria, we have nothing else there. So typically, in my experience, unless it’s a much larger company, it’s typically run by the headquarters, the headquarters decides kind of how they want to do it. And, you know, I think, to that point, Chris, you know, these are a really good tool, in a lot of cases to initially get people on board. And you know, we see this a lot where client will call, and they’ll say, you know what, we’ve got the perfect person, we got to move fast on this. And you know, moving fast, if you have to set up a subsidiary is not fast, and you’ll likely lose person. So that’s where these really are helpful.

And we see them best used, frankly, when they are kind of an initial onboarding, a way to onboard people. And then, at some point, you know, if the client gets sufficient people in the country or the region, then a lot of times, we’ll help them set up a local subsidiary. And for instance, we worked with a biotech company that long ago that was using these arrangements in probably six or seven countries in Europe, and they finally got to a point where they’re like, we have enough people now that it makes sense for us to employ them, us to manage this. And so we helped them set up a Dutch entity, and then it employed the people in the various regions. So I look at these in their best use as a way to quickly get folks on board. But at the same time, we do have other clients. We have one client that’s in like 50 countries and the vast majority of countries they only have one or two people. So you know, you have to kind of balance that in terms of what’s going to make the most sense, but there’s plenty of folks that start with a PEO that eventually set up their own their own arrangements.

Marlene Zobayan  24:47

I will say I have come across situations where a US company might have say a European headquarters, and that European headquarters might engage a PEO in one or two countries where it’s not physically present in. So for example, the client case I had it was a UK employer, it was a US company with a UK subsidiary. And then the UK subsidiary was using a PEO in the couple of other European countries that all rolled into that UK subsidiary. So we have seen that sort of arrangement too. I think the world is, it’s very vast and varied in terms of what companies are doing. So there’s no one size fits all.

But to answer that, to go back to your original point, Chris, I think if you are incorporating in a country, and then hiring a PEO in that country, you’ll really very much I think, more at risk by jurisdictional limitations, especially if there is something that goes wrong in that country in terms of non-compliance or withholding and reporting. You’d have an entity right there, and the tax authorities can easily point to you and say you’ve had a presence, why didn’t you do this?

Chris Dohrmann  26:01

And the deeper pockets would be the concern there. Okay. So I just wanted to say thank you very much, because I do appreciate your expertise, both of you, and I wanted to open this up, and maybe address a couple of questions that are coming in from the audience! The first one is, if the PEO is refusing to do the reporting, what can the issuing company do?

Marlene Zobayan  26:25

I think there’s a couple of different things they can do. I’ve had clients who, if they are about to incorporate in that particular country, they’ll go ahead and you know, finish that off, and then do the reporting themselves. Because they’re about your payroll register and transfer these employees over. They can encourage the employees to make sure that those individuals report the income themselves, and that mitigate some of the risks, or they can cash out. Often I’ve been told by PEOs that they cannot report non cash income so they can cash out the awards, and have those paid as a bonus through the PEO. But really, at that late stage, your hands are pretty much tied by the rules of what the country requires and what the PEO is willing to do.

I will agree with what John says, I have seen in the last few months, more and more PEOs, more willing to do the withholding and reporting, but it’s definitely not all of them at this point. Um, John, did you have any other creative solutions that you’ve dealt with on this?

Jon F. Doyle  27:28

Yeah, I think Marlene you’ve hit the main ones, you know, the last resort is obviously the cash out which everybody hates. But you know, that’s a way if you got to get the money to people, you could run it through the PEO they treat it like a bonus, they do all the tax withholding. The first one you mentioned, we see more, which is if we get in touch the client early enough, and they are contemplating an entity, that problem can solve itself, because by the time there’s a taxable event will have their own entity to do the withholding and reporting.

And then the second one you mentioned, I think which is basically you just let the individual take care of the tax obligations, you know, that’s basically treating them like a contractor, if you will, for purposes of equity award only, which again, we’d all love that, because that’s why we got a PEO in the first place. But at the end of the day, if the taxes have to get in, they have to get in. The only the risk we see there obviously is like I was talking before with contractors is, you know, the governments can say, no they’re not really a contractor, they’re really an employee, and you should be withholding and reporting.

And again, if the individual pays their taxes in, it’s probably a moot point, unless, of course, there’s employer social taxes or something like that, that they wouldn’t have paid. And that’s where we had, as you said, Marlene, we look at each individual country and in a lot of places it may not be a problem. But there will be some where there are those pretty steep employer taxes. And so there’s always that risk that you know, even though the, quote contractor paid in their taxes, if they’re reclassified that could bring in employer taxes, and then you would be on the hook. But I always argue with clients or are explained to the PEOs, you know, you guys are the ones actually sitting in country, technically engaging these folks. And I would expect the regulators are more likely to look at them. But then again, they may look at the deep pocket. So it really just depends on circumstances.

Chris Dohrmann 29:25

There was one other question that I think we addressed because it came in earlier in the conversation, which is – do you need to set up a subsidiary and we talked about that. So maybe I can close with my own question to you both. Just because you can do this, because it is seems like a very good solution to very real problem, should you?

Jon F. Doyle  29:45

Well, spoken like a true lawyer, I’ll tell you it just depends. You know it can be great in some circumstances. I like it best when it’s used as kind of an interim measure, if you will. But you know, as Marlene has carefully explained here, the taxes are super important. And if there’s not a clear understanding how those are going to be dealt with, there can be a real problem. So I think if you know on the front end, kind of, what you’re dealing with, these can be a great tool. Obviously, there’s some places they don’t work, you know, and that’s why it’s important to really check things out.

Marlene Zobayan  30:22

I completely agree with John, I have nothing more to add, on this point. Do your homework before you grant, it’s the best advice I can give to any company.

Jon F. Doyle  30:31

You know, to Marlene’s point, there’s still a lot of uncertainty, you know, the regulators and the different countries are still looking at these things, trying to figure them out. And you know, I fully expect there will be even more countries that are going to maybe take a look at these and say we don’t like it, you know, but they’re still, you know, they’re still kind of looking at it. In my view, where the countries have the biggest problems is, they just want to make sure the tax money is coming in, if the tax money is coming in, they probably have a lot less trouble with it, then, you know, let’s say a contractor arrangement.

Marlene Zobayan  31:05

So I’ve been talking a lot about the taxes, but there are significant securities, foreign exchange, labor law issues, and I want to hand over to John to maybe talk about those.

Jon F. Doyle  31:17

Yeah let’s start with the securities. You know, as I mentioned a little bit ago, you know, like the Philippines, if you have to qualify for securities exemption there, it may not apply, when you have a non-employee arrangement or a non-contract arrangement. In other words, it’s a third party. And so in every country, when you’re offering equity, there’s technically a securities offering. So what we basically got to do is make sure we fit within an exemption, or we have to get, you know, a filing or approval done. And in a lot of cases, you can’t necessarily do that, unless the individuals working for your company or one of your subsidiaries. So that’s an important thing to know right off the bat. In the vast majority of places I think you can do this, because the issuer will just have to make sure that it’s exempt, and a lot of times it will, because it will be a service provider at one form or another. But you kind of have to look at the details.

Marlene Zobayan  32:16

I was just going to say, and usually there’s a small number of individuals in that particular location, which is why you have a PEO and not a subsidiary, so you might fall under a small filing exemption.

Jon F. Doyle  32:27

That’s right, yeah! But they don’t always apply, though, for certain categories. In other words, if it’s an employee or employee of a sub, then it may work. In some cases, it won’t. So but by and large, you know, security shouldn’t be a showstopper here. You know, on the data privacy side, that’s interesting, because if the person is technically working for a PEO, then the PEO is going to be responsible for how it handles the data. And if it’s then giving the data to, you know, the client company, it needs to make sure the client company then is following the privacy rules and handling it. So it’s a bit of a chain in terms of who has the information. So again, it’s not insurmountable, but it’s something people need to be aware of.

Chris Dohrmann 33:17

Thank you very much for your time today. I always learn something when I’m speaking to both of you. Thank you, and I appreciate it!

Marlene Zobayan  33:20

Thank you!

Jon F. Doyle  33:24

Thank you, Chris and Marlene, pleasure. Thank you!

Chris Dohrmann  33:28

Thanks for listening to Own Up like Global Shares. This podcast was brought to you by Global shares and if you like what we’re doing, why not share with friends or leave a review? Until next time, take care.

The Own Up podcast is brought to you by globalshares.com. To get the inside track on employee ownership and equity compensation, click follow on your podcast player right now so you get the next episode automatically. Information provided in this podcast is intended for informational and educational purposes only. It may contain views which differ from the views of JPMorgan Chase & Co. For a specific guidance on how this information should be applied to your situation, you should consult a qualified professional. For full details see the show notes on your podcast player right now. The Own Up podcast is produced by dustpod.io for globalshares.com

00:00

This is Own Up, the Global Shares podcast about employee ownership and equity compensation. Answering questions and sharing with industry experts, here are your hosts, Chris Dohrmann and John Bagdonas.

Chris Dohrmann  00:21

Welcome back to Own Up the Global Shares podcast all about employee ownership and equity compensation. I’m your host, Chris Dohrmann, and I’m joined by my friend John Bagdonas.

John Bagdonas 00:31

Hi, Chris.

Chris Dohrmann  00:32

Hi, John!

In today’s episode, we’re delving into the world of executive services, providing insights and exploring the evolving trends that can supercharge your career in the c suite. What exactly are executive services, and why are they integral to the success of high level executives, we’ll discuss today! So joining us today is Executive Director of Executive Services at JP Morgan, Ryan Shreero, a seasoned professional in executive services. Ryan, you’re welcome to the podcast.

Ryan Shreero 01:01

Thanks so much, Chris. Happy to be here!

Chris Dohrmann  01:03

Tell us about yourself and the work that you do in executive services. Both you and I are acquainted as well as John but I’d love the audience to hear more about your background.

Ryan Shreero  01:12

Yeah, appreciate it. So I, you know, I come to JPMorgan after 18 years, all in executive services from Oppenheimer & Company, joined JP Morgan, as a, you know, exciting new role as we incorporate both executive services with a stock plan administration offering being Global Shares, which really just makes our executive services offering that much better. The idea behind it is to have more of a one stop shop where participants that are, you know, trading their equity, their company equity, have a participant portal to do that, but also have the full power of JP Morgan’s private bank to guide them through what is executive services, which is really Chris, focused around Rule 10b5-1 and the setting up and trading of scheduled trading plans.

Chris Dohrmann  02:07

Great, thanks, Ryan! And so you’ve defined it, which is really something that, that’s the first step. Most folks aren’t familiar with the complexity surrounding what executives have to go through when they’re trying to trade company equity. So what are the current challenges? What are the biggest challenges faced by executives today?

Ryan Shreero  02:27

Yeah, so you know, I’d say the number one and most important thing that we focus on is insider trading liability. So anybody that is within a company, and in the c suite, they’re subject to or privy to what’s called material non-public information, which makes it unfair to the rest of the world as far as trading goes. So they have a lot of rules surrounding that. And those rules are really, you know, only having a couple of open trading windows per year. And those trading windows are around when the companies, you know, release their earnings and everything becomes public. At that point in time, they have a window that will open up and they can put a trading plan in place at that time, and in that time only, and in good faith and without any material non-public information. And we help guide them through that. There’s also a lot of other rules that go hand in hand with that, as far as reporting goes and filing with both the exchange, and the SEC that we help guide them through as well.

John Bagdonas  03:32

Just a quick question, Ryan, in your experience, it’s about 10b5-1 plans, how many companies, on average, from a percentage standpoint require their insiders or their executives to utilize a 10b5-1 plan as compared to ones that maybe strongly recommend it, but don’t necessarily require it? What’s your experience in that?

Ryan Shreero  03:52

Yeah, that’s a great question John. In my experience well over 50% of companies out there require it and I would say another 48% of them strongly recommend it. This is something that really falls into the corporate governance space and they, you know, companies really need to have controls in place. Every company that issues equity to employees, and officers, of course, will have an insider trading policy and this will be part of that insider trading policy, either a strong recommendation or a mandatory, you know, 10b5-1 program in place. Additionally, what makes it a little easier for the company, on that note is to not have too many of them in place at one time, meaning do we have seven different, do we have 10b5-1 plans at seven different broker dealers with seven different contracts that we all have to have outside counsel review and things like that? Companies have always found that having, you know, one or two providers to focus on this has really been the best way to do it from a risk control perspective, from a reporting perspective, and, you know, it’s just, frankly, less error prone.

John Bagdonas  05:07

You and I know that it’s definitely a trend for at least for some companies where they don’t have any choice that is basically a directed broker, they have to go through a specific broker for the 10b5-1 plans.

Ryan Shreero  05:18

Correct! Yeah, there’s a lot of companies that are out there that are like that, it gets a little trickier for the directors of the company, because they’ll have, you know, they’re not technically officers of the company, even though they’re directors, they sit on the board. There is, you know, some flexibility when it comes to the directors but in an effort to make everyone’s lives easier, including those directors, including, especially those folks at the company that are having to do all the reporting, most will require to be in one place and in one place only. So, you know, we actively go after, here at JP Morgan and in coordination with Global Shares, we actively go after that sort of captive broker strategy, and really try to partner with our companies to capture all those 10b5-1s and make it a seamless experience for both those officers and the employees in the company that are administering the plan.

Chris Dohrmann  06:10

So just to summarize what we’ve been discussing so far, the 10b5-1 plan, and that’s nomenclature, right, from the SEC guide, is really a proactive defense for both the corporation and the executive against allegations of insider trading, correct?

Ryan Shreero  06:27

Yes, that’s 100% correct Chris. So it’s a defense against the allegations of insider trading. That’s the key benefit. That’s the main focus that we’re, you know, we’re working with on this. And that’s the, really from both the company and the participant or officer of the company in this in the sense, from their perspective, that’s the number one most important thing, it does have a few other key benefits as well. One being, you know, really minimizing the negative media perception around selling as an insider, you know, as you guys may well know, and for the audience, anytime you’re in a situation where you’re an officer of a company, and you make a sale of stock, that becomes public information. So both, you know, an intent to sell and an actual change of beneficial ownership forms get filed with both the exchange and the SEC and it becomes public information. And now, you know, investors and shareholders and, you know, everyone that pays attention to the news is wondering, you know, why is this person selling? Is there something wrong with the company? You know, when you’re selling pursuant to a 10b5-1 trading plan, you know, it really minimizes the effect of that, because people can look, and they see in the disclosure, that it was done pursuant to a trading plan, that it’s more of a scheduled sale, and it’s more of a planned process, not a oh no, I want to dump my stock type of situation, which is really good.

One more thought on that too Chris is, it’s you know, on the scheduled sale front, it is just that right? You open, your window period does open, you put the plan in place, you know, you have a cooling off period, which is now all the way at 90 days, then the plans can start to trade. They trade pursuant to that plan on a schedule, so that you provide some flexibility to that officer of the company as well. So they’re in a situation where instead of waiting for the next open window period, and oh, I’m going into this next open window period, but I have a FDA trial, and guess what the window is not going to open for me because I know what went into that, and you know, I’m not going to have the opportunity to put a plan in or put a trade in during that open window period, because I have material non-public information. Instead, once the plan goes off, it can trade through blackouts, it can trade through, and what I mean by blackouts is the non-opening of a window, right, the non-trading blackout for everyone. It can trade through all of that, regardless of what information that officer has at that time because it’s the plan was set in place prior to that information. So it can provide some real trading flexibility as well.

John Bagdonas  09:13

I know Ryan, you mentioned about cooling off periods, brings up the question to mind for me, is there any guidelines or rules about minimum plan length or maximum plan length?

Ryan Shreero  09:24

You know we try to focus around a year, I would say that if your plan is  six months to a year is where the real sweet spot for plan links. If you’re seeing plans over two years, I think that’s frowned upon in my experience that’s not best practice out there. What I like to do and this is what we do for our executive services clients here at JP Morgan is we’d like to have those, we’d like to have plans in a predetermined open window period, and typically put a new plan in place during that open window period so there’s consistency of trading throughout. So I think that’s, you know, one little note, I’d like to add on here, six months to a year, try to have it terminate or expire during what would be a known window, open window period. That way you can put a new plan in place right off the bat there without having to wait for both an open window and a new cooling off period.

John Bagdonas  10:24

Well, let me ask a related question, which I’m sure is probably frowned upon, but what about the prevalence of an executive having multiple concurrent plans at the same time?

Ryan Shreero 10:37

Yeah, great question. Not only frowned upon, but you know, as far as the rule changes go, you know, it’s really not something anybody is going to be doing going forward, you know, not, you can have concurrent plans, like one terminating during an open window period, another one coming into place, but you won’t have, you know, you won’t see companies allowing, and broker dealers, trading multiple plans for any officer of any company that’s been terminated.

Chris Dohrmann  11:05

So again, to summarize, I mean, we’ve been talking about this as if we, because we talk about it almost every day, but there’s a lot of jargon. So we’ve identified the role, we’ve identified things like, you know, the fact that you’re signing up for it, and the company may be imposing it, but they may be giving you some choice in the number of plans. And we’ve also defined the cooling off period. My point there is, is financial education part of this process, because it’s better to have an informed executive population signing up for this, or is that your experience?

Ryan Shreero 11:39

You know, it’s definitely my experience Chris that it’s better to have an informed population. And what we like to do is, you know, once we know we’re going to be servicing all the executives of a particular issuer from both a 10b5-1 or just open window control stock trading perspective, we like to host an education event, whether it be a zoom, or in person where we really bring them up to speed on – what is executive services? What is Rule 10b5-1? What is your own company’s insider trading policy, what are you allowed to do, what are you not allowed to do, and really help to guide them through that process, because it is cumbersome. It is, you know, again we’re in a situation here where any of these trades become public information. So we want to minimize the media effect of these trades. We also want to protect the stock price at all costs too so we help guide them too, and advise them on what goes into a plan. You try to not have large blocks of stock coming out at the market, which would have a negative impact on the share price. We try to really educate them both in a group setting and then down to the individual from a planning perspective.

A lot of these equity securities that they’re getting have different types of tax treatment, whether it be I mean, more industry nomenclature again but, whether it be incentive based stock options or non-qualified stock options, there’s a different tax treatment to both of those, restricted stock unit, vesting at ordinary income. So there’s a ton of planning that can go into this, and should go into this in an effort to really, you know, maximize the benefit of the securities. I look at it like this, I want to maximize it both for the company and for the individual. Company spend a lot of money granting equity to employees, that is the sort of, you know, the number one way to capture and retain talent these days, and we want them help them maximize that. We also want the employee, we want that to be a good experience for them. I’ve worked on cases where there’s been, you know, this kind of multi country tax treatment and situations where at the end of the grant, which was supposed to be a positive experience for the employee they ended up paying taxes in two different countries. It wasn’t that far above the strike price on the option in the first place. And it ended up being a negative experience for the employee. And I know that’s not why companies grant equity. So we want to help educate them to maximize that both from the company perspective and from the officer perspective.

Chris Dohrmann  14:35

Ryan, you’re a perfect guest because you lined up my next question. Obviously, let’s be frank, the goal of a corporation is to make an increase revenue for not only the employees and the executives but for the shareholders. But the point of trading the stock is for an individual’s financial goals and objectives. So I think the plan also needs to incorporate some of those executives goals, whether it be you know, financial planning for a future development for future generations, for succession planning, for tax planning, all of that has to come into place, is that your experience as well?

Ryan Shreero  15:16

100% There very rarely will you see a plan that just gets inputted and is just a pure function of trading. I mean, there’s a lot of thought that goes into this. And I think the higher up you get into a company, and the amount of equity you’re getting from that company, the more planning that actually goes into it. You know, we’ve been seeing this sort of firm wide blackout at issuers a lot and folks that you know, are only getting, you know, a little bit of stock each year having to put 10b5-1 plans in place.  I would discourage that I think it’s much more for the 144 filer population, meaning the officers, directors, 10% shareholders, folks that really have that extra reporting responsibility, because the plans are, you know, a lot goes into them, a lot of planning work goes into them to maximize not just the experience of the participant, but again, you know, managing for impact on the stock and managing for media perception and all these other things. So, you know, I think the plans, in my experience, there’s a ton of work that goes into it, both from a tax and financial planning perspective. Then it actually comes to our desk here, with the general thoughts of what this particular participant is looking to accomplish, and we’ll craft what our thoughts would be on how to accomplish that in a plan. And we’ll have many iterations of it as it goes through back and forth with the participant and issuer council and our own counsel until we come up with a plan that really makes sense, and really achieves what they’d like. So a lot goes into it, a lot of planning, a lot of strategy. And then I would think at the 10b5-1 the actual plan itself is just a tool to accomplish that strategy.

John Bagdonas  17:13

Now, Ryan, let me ask you a planning related question, obviously, you’ve definitely stressed how important that is. But as we all know, circumstances change. And so as thoroughly or as comprehensively as someone may have planned or put thought into a 10b5-1 plan, what are the circumstances or the flexibility if need be to amend a plan? Because of, you know, things that have changed either in the person’s personal life or circumstances, or for any other reasons that they may want to amend a plan?

Ryan Shreero 17:49

Yeah, great question John. I think, you know, things do happen, right? People have events happen, people have personal things that would require them to amend or terminate a plan. I would say, since the rule changes though early in the year, we’re not really in a situation where we can really modify plans anymore. The reason being is each modification to any plan starts a new cooling off period. So we would have a situation where if let’s say you had a plan in place, we come into an open window period, which allows for new plans and for modifications at that point in time, not prior, not during a blackout, but during an open window period. We can put in an amendment to that plan or a modification to that plan. But what happens is you start a new cooling off period each and every time you do that. So essentially, John, you’re putting a new plan in place. So we don’t even look at modifications and amendments anymore to plans, we just considered them all new plans at that point in time, because you’re always per the rule, you’re starting a new plan, you’re starting a new cooling off period. So that’s what we look at, we consider that is a new plan. And then I think as far as terminations go, I want to touch on that for a second because there is no rule that states that you cannot terminate a plan, right? So you know, according the SEC, according to the rules and regs and industry best practices, a plan can terminate for any reason at any time. There’s no, a non-trade is not an enforceable action that said, you know, everybody needs to be able to sign off on this from the company side from the broker dealer side and not just the participant. So each company will vary as far as their insider trading policy goes when it comes to terminations, but sort of generally the rule is that you can terminate at any time.

John Bagdonas  19:50

But as you sort of implied, the optics of it depending on the circumstances are not necessarily the best of terminating a plan, particularly if the executive is continuing employment.

Ryan Shreero 20:01

Correct, yes! Each and every issuer will have their take on how that’s to be handled. Most require signatures across the board from both the broker dealer side, the participant side and issuer side, meaning CFO or general counsel on that side as well. So, there’s at a minimum triple sets of eyes on these but historically speaking, anybody could terminate a plan at any time.

John Bagdonas  20:32

Alright so Ryan, in your vast experience, maybe is there one or two success stories that are particularly memorable for you that you could share with us?

Ryan Shreero  20:41

Oh, sure! I mean on this executive services desk here at JP Morgan, I think the average industry experience is 25 years. I’m sort of the baby here at 18. You know, it’s a combine 150 years of experience. We’ve seen everything in every way shape or form you can imagine. Some of the things that I would point to as being very successful are companies that have, for example, may have brought ownership but it may be a circumstance where it’s thinly traded for one reason or another. What we see a lot of times is the difference between common shares, and, you know, like B shares, for example, where just the founders and some of the super senior folks at the company have those, and they’re going to convert them into common and trade. And now you have a, what was a thinly traded situation, all of a sudden have a big flood of stock hitting the market. So we will try to guide them, you know what we like to do ahead of time, we have dedicated traders that support our 10b5-1 desk, and we would have them make a market in those securities ahead of time, where they know where the buyers are, they, you know, you can’t pre-arrange a sale, and it always has to be a market transaction, but you can feel where the levels are, if you start trading in the security ahead of time, so we can kind of guide them from that perspective.

What we’re hoping to gain in every circumstance is a very orderly disposition of shares. So we would have them work ahead of time to feel where the levels are, and know where they can execute those trades. So thinly traded stocks is one thing, just the real tax planning is another I would say, and that isn’t specific to our desk, but more of the private bank and all the work that goes into planning for any of these trading plans. We’ve seen circumstances where someone was in a situation where they were exercising and selling incentive stock options same day, and really the tax planning that goes into that, if you do it properly, you can be exercised and hold for additional year, and you would have a long term capital gains treatment on that, as opposed to ordinary income. So having some proper planning going into these and not being forced to, right at the very end, oh, um, you know, I’ve had this grant, or have had these options for almost 10 years, and now I’m running up against a deadline, because they’re going to expire, being forced to exercise and sell as opposed to, prior to that, being able to exercise and hold and get the preferential tax treatment is a big deal. So I would say, you know, a lot of our success, again, 10b5-1 is really a tool to achieve it, but a lot of our success comes from the planning work that goes into this from the private bank side.

Chris Dohrmann  23:42

Ryan, John, I’d like to ask for your closing thoughts, because I want to give mine right now. Ryan, I’d love to have you back. Because you’ve mentioned a couple of times, the rule changes. And we’ve talked about the introduction of the executive services and 10b5-1 specifically. But I’d like to talk about the rule changes that have come down, because I think there are some implied changes, implied activity that’s going to come about because of those changes. And I think it’s important for folks to know, so please, if you could make time to come back, I’d love that.

Ryan Shreero  24:11

Oh, it’d be my pleasure, we could cover up all the rule changes! We could devote an entire episode to that Chris! Because we went through about a 20 year period where there was really no changes whatsoever, on the heels of moving away from 144k and changing some holding periods and things like that to 20 years of no changes whatsoever to a massive amount of changes in all. They telegraphed it, we knew it was coming. We were urging issuers to focus on it well ahead of time, but basically in one fell swoop, they made some pretty broad changes, so happy to devote some time to that and happy to, you know, cover off our interpretation of what those changes are. And I say that, because the language on those can be very vague, and it’s intentionally vague and subject to interpretation. So we will coach you up on, you know, what we think, what we’ve been advised to, from our own interpretations from counsel here.

Chris Dohrmann  25:17

And, John, I just wanted to get your opinion, because I think the fact that the 10b5-1 sounds difficult and a little complicated and a little bit overbearing, but I think we have found that people that employ the use of 10b5-1s, it’s been of benefit not only to the corporation but to the individual, the executive or the 144 reporter.

Ryan Shreero 25:40

Yeah!

John Bagdonas  25:40

Yeah! I mean, I’m sorry, go ahead, Ryan.

Ryan Shreero  25:42

Yeah I would say I almost to a fault, right, to the point where, you know, it’s such a beneficial experience, both from a planning and trading perspective that more folks want them that maybe don’t even actually need them. They just have blackouts that we need to navigate through. So, we’re happy to dive into that and advise as well. But yeah it is a cumbersome rule. And it’s a cumbersome area. That said working through it does become a net positive experience for both the issuer and the officer of the company.

John Bagdonas 26:18

And I think that’s an important point that you brought up earlier. And I think Chris touched on it as well that there’s a true cost involved, obviously, in managing and putting the plans in place. But ultimately, you want to weigh that against the risk benefit I should say probably is the best way to describe it. That if there are people that are just using them for the sake of the fact that well, you know, the senior people in the organization are so I should too, where you’re not necessarily going to be subjected to the same, or have a need for an affirmative defence with something that’s very ordinary, from a transactional standpoint, that you’re expending this cost and effort to put a plan in place or a 10b5-1 for someone where it doesn’t necessarily apply in terms of what the true risk benefit profile is for that individual.

Ryan Shreero 27:09

Totally agree. There are other ways to achieve that. You know, I know for example, working with Global Shares, our clients that are both, you know, 10b5-1 clients with the private bank, and also Global Shares clients where, you know, Global Shares is their stock plan administrator. I know that Global Shares has the capability of turning off trading at any point in time to sort of enforce those, or the company’s allowed to through the Global Shares website, turn off trading to enforce those blackouts and then turn them back on when everything’s good to go! That 9 times out of 10 for folks that don’t have that extra you know, filing and reporting and preclearance process that 9 times out of 10 will satisfy perfectly for those folks. And then you know, we’ll focus on the reporting and filing requirements for the folks that are in contact with material non-public information.

Chris Dohrmann  28:08

A huge thank you to our guest, Executive Director of Executive Services at JP Morgan, Ryan Shreero. It’s been great talking to you!

Ryan Shreero 28:16

Thanks Chris!

Chris Dohrmann  28:18

Thanks for listening to Own Up by Global Shares. If you found this exploration of executive services enlightening, be sure to subscribe and share with your peers! Until next time, at least for now, from me, Chris Dohrmann…

John Bagdonas 28:30

And me, John Bagdonas!

Chris Dohrmann 28:33

Thanks for listening and take care!

28:35

The Own Up podcast is brought to you by globalshares.com. To get the inside track on employee ownership and equity compensation, click follow on your podcast player right now so you get the next episode automatically. Information provided in this podcast is intended for informational and educational purposes only. It may contain views which differ from the views of JPMorgan Chase & Co. For specific guidance on how this information should be applied to your situation, you should consult a qualified professional. For full details see the show notes on your podcast player right now. The Own Up podcast is produced by dustpod.io for globalshares.com