More employers are offering global stock ownership plans as a means of improving recruitment and retention on an international scale

Like other high-tech employers, Advanced Micro Devices Inc. In Sunnyvale, Calif., began offering company stock early in its history to foster a spirit of

When the 30-year-old manufacturer of integrated circuits was young, stock options were an effective way to share prospective wealth with critical employees and recruit the high-tech talent necessary to build a business, says Reid Linney, director of human resources.

"Without offering stock options, you just can't compete in the marketplace. It's expected as part of any compensation plan," he says.

An established manufacturer with 13,000 employees in 15 countries, AMD four years ago exported its stock-based compensation philosophy to its global centers of operation. "We had to change almost everything about the way we had been offering stock options," Linney says. "We had to create a completely different strategy to deal with the complexity of operating globally."

With more than 7,500 employees eligible for stock options around the world, AMD embarked on creating a stock option program that was flexible enough to work within the securities and tax laws of many countries, while retaining a consistent level of value among executives. This proved particularly difficult since value, the company discovered, is a relative concept.

"Our goal was to create a global management team that would be opportunity driven--an international leadership that would perceive corporate opportunity and performance as personally valuable. That meant not only producing a plan that would comply with many regulations, but a program that would be appealing to employees from cultures in which stock ownership is not always perceived as it is in the U.S."

In some Asian companies, for example, stock ownership is an intangible benefit with little practical value. "Although this hasn't been the case with our employees, it is pretty clear that in some countries, workers would rather be rewarded with livestock than company stock," Linney says.

Although the program is working well, Linney says, administration and communication is a continuing challenge. The company offers fewer options to more employees and communicates aggressively to make sure employees in each of its overseas divisions understand the monetary and psychological value of the benefit.

AMD is just one of a growing number of global employers that is expanding employee stock ownership benefits and encountering the sometimes discouraging complexity of administrative issues, employee benefits and compensation, experts say.

"Is stock ownership just a part of the U.S. investment mentality? Ten years ago, that might have been true," says Carol Rutlen, an employee benefits and compensation consultant with PricewaterhouseCoopers' Palo Alto, Calif., office. "But as U.S. multinational companies with operations everywhere around the world compete for employees in a global market, they have discovered that stock ownership has a broader appeal than ever before."

Indeed, global stock plans that offer similar options to similar classes of employees around the world are becoming more popular as a means of building additional compensation for executives and improving recruitment and retention, she says. "U.S. companies operating in a global environment are competing not only with U.S.-based multinationals, but also with multinationals based elsewhere in the world."

International Levels

Non-U.S. multinationals are also on the stock ownership bandwagon. Lafarge Group, a building materials manufacturing company in Paris, began offering stock options to its global employees in 1987.

"Stock options have had a classic appeal for American companies," notes Louis Dugas, senior vice president of social policy. "But they have also become important tools for European companies as well."

In France, for example, stock options are not just another means of compensation, but have become tools of social integration among all levels of employees, he says. "Stock ownership provides the feeling of belonging to the company It is the connective tissue that binds executives, managers, and workers together in a partnership for group management," Dugas says.

In 1995, from among 20,000 eligible employees, about 15,000 employees executed stock options. This year, the company projects about 75 percent participation from among 30,000 eligible employees. Eligibility is determined by local executive leadership according to local regulation.

For global stock option plans to succeed, good communication is critical, Dugas says. Lafarge created a video presentation about the program to accompany posters, print communication in local languages and small group meetings.

"It's a huge project, but we review its performance every two to three years, and we are always very satisfied with its value to our company and employees," Dugas says.

Still, while global employee stock plans have been booming, they are hardly universal, according to a recent study by William M. Mercer Inc. in New York. The number of domestic companies offering broad-based international participation in stock option or stock purchase plans has tripled in the past 10 years, but most plans do not offer universal international coverage.

Mercer invited 304 companies with global stock plans to participate in a survey, and, of the 113 that responded, 100 were

U.S. public companies.

Among those respondents, stock plans are most often offered to senior management and management employees, though some include exempt and nonexempt employees.

Plan objectives cited by respondents included:

* Fostering a culture of employee ownership,

* Aligning with shareholder value, and

* Providing incentives for executives.

Although their plans are designed for global participation, 50 percent of the respondents said they do not include all international operations in their plan. Only about 50 percent of eligible employees participate in the plans.

Participation varies widely from country to country, according to the study. U.S. employees are most likely to exercise stock options, followed by employees from Canada, the United Kingdom, and Germany. Another survey of 400 employers, conducted by PricewaterhouseCoopers and the National Association of Stock Plan Professionals, indicates that while most respondents offered stocks to some international employees, offers varied by country.

Employers with workers in France, Sweden, Netherlands, and the United Kingdom are most likely to have distinctly international plans. Companies with employees in China, India, and Russia have a higher incidence of not offering stock options to employees in those countries due to unfavorable regulation.

"When stock utilization is extended to a multicountry environment, the problems are, of course, dramatically compounded" notes Ronald J. Barton, national director of Ernst & Young in Atlanta. "Employee perceptions, tax, legal, administrative and currency issues make the net effect of the same stock opportunity dramatically different in each country."

Employers may want to use stock options to create links between executive and shareholder interests as well as preserve a sense of internal equity to a global executive peer group, but should be aware that the same plan in foreign countries delivers a different value to each participant, he says.

In some underindustrialized countries where salaries are low compared with the United States, stock option values may exceed annual salaries many times over, he notes. This economic scale could undermine retention by encouraging very early retirement.

"Without a clear definition of the stock ownership objectives, it is impossible to evaluate the best strategy for its use. Their implementation may require different approaches in different countries," Barton says.

Problematic Areas

Limiting stock options to mostly U.S. employees or to smaller groups of global workers requires clear objectives and careful communication, employers say. Otherwise, the benefit can become problematic.

Coming Inc. in Corning, N.Y., launched a five-year stock option plan last year that is limited to less than 10 percent of its work force, according to John MacMahon, director of global compensation. About 600 of the company's 17,000 employees are eligible.

"From the beginning of the plan design, we wanted to limit options to employees with critical roles and performers who make critical contributions to the company," he says. "The plan is open-ended, and employees at all levels of the organization can be eligible if they meet that criteria."

By limiting the number of employees who may participate, the company emphasizes the value of the options as a reward and recognition. But, to communicate its purpose and underscore its value, communication to all employees is critical, MacMahon says.

Yet, as more employees understand the value of stock options as compensation and reward, the company must consider expanding its program to a greater number of employees both inside and outside the United States.

"Stock options have received a lot of positive press in the U.S., and employees are beginning to expect some sort of stock compensation. It is becoming a competitive issue. This is an issue that we will have to consider in the next two to three years," he says.

Global equity is also an issue, and as stock plans for overseas employees expand, Corning may also have to review its stock plan strategy with its international employees, he admits.

Those plans that focus primarily on domestic employees are also not without regulatory problems. The Financial Accounting Standards Board has been reviewing procedures for employee stock plan accounting since 1996 and released its first formal exposure draft of new regulations on March 31, 1999.

The proposed rules do not require that employers take a charge against earnings for the value of options offered to employees, as feared by employee benefits consultants.

But the regulations do limit some employer flexibility. Once an option price is lowered to increase its value as compensation or to broaden its appeal, the option must be accounted as "variable plan." Additional changes or repricing in a variable plan must be recorded as a charge against earnings until the options are exercised.

The new rules could raise the corporate cost of administering plans and create new levels of accounting procedures. They were scheduled to go into effect in September after the FASB reviews industry commentary.

But international or domestic regulatory issues are not insurmountable, notes Lowell E. Panzer, director of global employee stock program services at Buck Consultants in Secaucus, N.J. And complex regulations should not prevent employers from using stock options as a benefits and compensation tool, he says.

"International security regulations, tax laws, and foreign currency fluctuations are all issues that an employer must consider before implementing a global stock plan, but all of these concerns are part of a regular due diligence process," he explains. "Companies need to get a total measure of the complexity of the issues they face, but actually, they aren't all that bad.

"The real question employers need to ask is 'Does it fit culturally?'" he says. "Global stock option plans are not simple methods for providing additional compensation to a handful of employees. They are part of a larger strategy that supports the retention process and builds executive peer groups throughout international operations."

Panzer recommends that employers market stock option plans to employees and communicate their value aggressively to boost participation and satisfaction. Even though stock option plans may not be popular or perceived as valuable in many countries, he believes all international employees can be taught their value.

"Stock has become a global currency," Panzer says. "Company stock can be the natural form for global compensation and benefits and extremely effective in meeting management goals--if it is used correctly."

For the Line

Senior executives aren't the only employees benefiting from growth of stock-based benefit plans. Employee stock purchase plans (ESPPs) are also booming, according to a recent study from Hewitt Associates in Lincolnshire, Ill.

ESPPs allow rank-and-file employees to accumulate company stock through a payroll deduction program, usually on an after-tax basis. Unlike stock options given to senior executives, ESPPs do not necessarily have to conform to Sec. 423 of the tax cede that allows participants to defer tax liability, though many do.

Employees generally contribute to the plan for a year or less, and then covert funds on deposit to stock at the end of the year, paying the lower of stock prices at the beginning or end of the accumulation period. Plans that do not conform to Sec. 423 usually offer shares at market price only.

A survey of 100 large employers that offer ESPPs reveals that the benefit has become an important tool for employee asset accumulation and productivity. Survey respondents included employers from a variety of industries who offered the benefit plan to all salaried and nonunion employees. About 42 percent of survey participants had more than 7,500 eligible employees, and about 70 percent offer the benefit to non-U.S. employees.

About 80 percent of the companies said that their ESPPs were intended to increase long-term employee ownership of business results; 71 percent of companies want to increase employee awareness and involvement in stock performance; and 70 percent use the plans to offer an additional asset accumulation vehicle to employees.

Among these objectives, employers were bullish on ESPPs as an economic benefit. About 86 percent reported that the plans were effective in delivering benefit value. About 82 percent said the plans increased employee awareness and involvement in stock performance. But only about two-thirds of employers said ESPPs supported long-term ownership of business results.

Most of the surveyed employers (77 percent) believe that employees have a positive perception of the plans, and about two-thirds say employees have a moderate or high level of understanding of plan benefits.

But one problem with ESPPs has been participation. Only about 15 percent of employers reported participation rates of 50 percent or better; about half had participation rates below 25 percent of eligible employees.