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Ten New (and Resurgent) Things To Think About in 2013

Ten New (and Resurgent) Things To Think About in 2013. February 2013 Emily Cervino, CEP. What’s Happening in 2013?. Yikes! 2013 Tax Changes Looking Ahead - Potential Implications of 2013 Tax Changes Pesky Parisians – Changes to French Qualified Awards

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Ten New (and Resurgent) Things To Think About in 2013

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  1. Ten New (and Resurgent) Things To Think About in 2013 February 2013 Emily Cervino, CEP

  2. What’s Happening in 2013? • Yikes! 2013 Tax Changes • Looking Ahead - Potential Implications of 2013 Tax Changes • Pesky Parisians – Changes to French Qualified Awards • Performance Awards: Rewarding Performance or RSUs in Disguise • Participant Perceptions Perking Up? • No Money Left on the Table • Back In Style: Employee Stock Purchase Plans Turning Heads Again • Revisiting Retirement • Tell it Like it Is: Plan Analytics for Management • Ownership Guidelines FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  3. Yikes! 2013 Tax Changes • Effective January 1, 2013, changes in tax rates apply to income from stock option exercises, restricted stock and RSU vesting, non-qualified ESPP purchases, sales of stock, and dividends. • Top federal withholding rate on supplemental income rose to 39.6%. • Supplemental income subject to one of two flat rates that are linked to income tax rates. • For aggregate supplemental wage payments totaling up to $1 million during the year, the rate is 25% (the rate of the third income tax bracket). • For aggregate supplemental wage payments that exceed the level of $1 million in a calendar year, the rate is now 39.6% (the new rate of the highest income tax bracket). • Social Security rate returned to 6.2% up to $113,700 in 2013. • Increased Medicare on compensation income for high-income taxpayers from 1.45% to 2.35% • Single > $200,000; Married > $250,000 • Indexed the annual AMT income exemption amounts permanently for inflation. • New tax legislation did not extend the refundable AMT credit that was available for the tax years 2007 through 2012. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  4. Yikes! More 2013 Tax Changes • New 3.8% Medicare surtax applies to investment income, such as capital gains from stock sales. • Capital gains tax rate that applies to the proceeds from a stock sale increased: • To 20% for single filers with income > $400,000 and for married filers with income > $450,000. (For taxpayers whose yearly income is below thresholds, the top rate remains 15%.) • Tax rate on dividends increased: • To 20% for single filers with income > $400,000 and for married joint filers with income is > $450,000. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  5. Looking Ahead - Potential Implications of 2013 Tax Changes • Taxes are up • Taxes are up on all W-2 income • What are the options? • stock options offer the ability to time the year for recognizing income, • defer income into the future with RSUs and PSUs • Do ISOs help? • For people in the highest tax bracket, the tax advantages of ISOs compared to NQSOs have been slightly reduced • But, continue to offer benefits of lower capital gains vs. income tax rates for qualified dispositions. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  6. French Qualified Plans – Tax Withholding for French Non-Residents • As of April 1, 2011, participants who are in France during part of the service period, but leave prior to exercise/vest subject to tax withholding; • Qualified awards – Sale • Nonqualified awards – exercise/vest • Managing the withholding • Qualified awards – administrator and payroll • Nonqualified awards – administrator and payroll • 39% of companies operate a qualified French free share plan* *Source: 2012 Global Equity Incentives Survey, PWC and NASPP. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  7. Changes to French Qualified Awards On the heels of the July 2012 increase in employer social taxes, French Constitutional Court issued a decision on December 29, 2012 on measures in the 2013 Finance Law: Cancelled some controversial provisions, e.g., proposed increase of social contributions, which would have gone up from 10% to between 17.5% and 22.5% Eliminated minimum four-year holding period requirement for “qualified” stock options granted on or after September 28, 2012 No changes were made to tax and social security regime applicable to gains on stock options granted prior to September 28, 2012 Does not impact holding period requirements for French-qualified RSUs For “qualified” awards granted on or after September 28, 2012 Gains realized at exercise or vesting are subject to progressive tax rates of up to 45% at the time of sale (no longer at flat rates) Employer is liable for employee and employer social charges where it fails to report gains on annual declaration FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  8. Changes to French Qualified Awards –What does it really mean? French-qualified award income subject to a maximum combined tax rate of approximately 61% (plus existing 3% or 4% surtax for high earners. Alternative? The combined tax rate for non-qualified award income is 59%. What companies are doing now: Reviewing and re-thinking French equity programs Updating French sub-plan and option agreement to remove any references to holding period restrictions Updating restrictions regarding holding periods Updating any employee communications, e.g., tax supplements, to address new legislation FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  9. Performance Awards: Rewarding Performance or RSUs in Disguise • Fidelity performance award data • 89 clients • Average participant size: 178 (Ranging from 2–2,439) • Payouts over 5 years (’08–’12) • 1-year to 3-year plans • Compared payouts to a company’s performance • Benchmarked performance against S&P 500 – focused on TSR & EPS • Payout classification: • Payout Above Target considered high pay • Payout below Target low pay Source: Fidelity Stock Plan Services Performance Plan Study, March 2012 FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  10. Performance Plans Align Pay with TSR Performance Performance Awards: Rewarding Performance or RSUs in Disguise Payouts aligned with TSR Performance 72% of the time • Key Conclusions: • Payouts are in directional alignment with Total Shareholder Return (TSR) relative to S&P 500 companies • Outliers are mainly due to companies measuring performance on metrics other than TSR Source: Fidelity Stock Plan Services Performance Plan Study, March 2012 FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  11. Performance Plans Align Pay with EPS Growth Performance Awards: Rewarding Performance or RSUs in Disguise Payouts aligned with EPS Performance 70% of the time • Key Conclusions: • Payouts are in directional alignment with Earnings Per Share (EPS) growth relative to S&P 500 companies • EPS has a stronger statistical correlation to performance compared to TSR, with fewer significant outliers Source: Fidelity Stock Plan Services Performance Plan Study, March 2012 FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  12. Performance Measurement Period: Implications of Short vs. Longer Term High Pay rewarded for High Performance 72% of the time 3-year plans have the strongest correlation between pay and performance • Key Conclusions: • Although there are challenges with setting longer-term goals, 3-year plans have a stronger pay and performance relationship • Bucked expectation that 1-year performance periods would be better aligned due to goal setting Source: Fidelity Stock Plan Services Performance Plan Study, March 2012 FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  13. Participant Perceptions Perking Up? • 2012 Participant Research • 1800+ participants; 100+ companies • SOP, ESPP, and RS participants = aggressive savers • 18% of household income saved • What to participants plan to do with stock plan assets? • 57% earmarked for eventual investment or retirement savings • 13% targeted to pay off bills or debt in the future • Increased awareness • Restricted stock value - 82% (vs. 67% in 2011) • Option value – 86% (vs. 79% in 2011) • Vesting schedule - 88% (vs. 78% in 2011) FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  14. No Money Left on the Table – Auto Exercise at Expiration • In-the-money options left unexercised at expiration represent • Money left on the table • Compensation expense incurred; no compensation delivered • Demoralizing to employees • Considerations • In the money • Percentage • Dollar amount • Authorization • Net exercise vs. sell to cover • Plan provisions • Terminated employees FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  15. Back In Style: Employee Stock Purchase Plans Turning Heads Again • Despite the challenges imposed by FAS 123R/ASC 718, ESPPs are still an important component of many equity compensation plans • ESPPs can help promote an ownership mentality across a broad base of employees at a relatively low cost. • Plan design changes, particularly those related to discount rates and look-back periods, often have a big impact on participation rates. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  16. Back In Style: Employee Stock Purchase Plans Turning Heads Again • Lots to Love • Broad-based • Guaranteed appreciation • Right combination of offering period, discount and lookback • Improve employee motivation/loyalty • 45% of ESPP-only "work harder"; 80% want future employers to offer plan* • Non-excessive • Expense efficient • Cash inflow • Engaged employees • ESPP-only participants are only slightly less aware of the current stock price than RS/options participants (81% vs. 93%); nearly as likely to check after each purchase period - 70% vs. 80%* • Minimal share usage • Corporate tax deduction • Section 423 – upon disqualifying disposition • Non Section 423 – upon purchase * Fidelity Stock Plan Services Participant Research, 2012 FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  17. Revisiting RetirementUS Tax: Retirement Eligibility FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION. • If plan/agreement contains provisions to accelerate (or continue) vesting at retirement • Participant “earns” the shares when they become retirement eligible • Accelerates accrual of expense • Grant date to Retirement Eligible Date • Taxation event ! • Retirement eligible date OR • Grant date (if retirement eligible at the time of grant) • Some companies have tried to avoid this tax treatment by inserting a clause in the agreement • Acceleration / Continuation of vesting at discretion of board • Therefore receipt not “guaranteed” • Therefore no taxation event at time participant becomes retirement eligible? • IRS representatives have asserted (off the record) that they would look at “facts & circumstances” • Has anyone ever forfeited? • Is it just a “rubber stamp”?

  18. Revisiting RetirementUS Tax: Retirement Eligibility 1 Rule of administrative convenience allows FICA to be collected at any date (after vesting) during the year. Many companies “deem” FICA collected on 12/31 when often SS limit has already been met. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  19. Revisiting Retirement * 2010 NASPP Stock Plan Design Survey FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  20. Tell it Like it Is: Plan Analytics for Management Reporting vs Analytics - What’s the Difference? FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION. • Reporting translates data into information to show what is happening • What happened? When did it happen? • How many? How often? Where? • Where exactly is the problem? How do I find the answers? • Analytics transforms data into insights to show why something is happening and what you can do about it • Why is it happening? What opportunities am I missing? • What if these trends continue? How much is needed? When will it be needed? • What will happen next? How will it affect my business? • How do we do things better? What is the best decision for a complex problem?

  21. Tell it Like it Is: Plan Analytics for Management Business Objectives What’s Interesting? Visual reporting and analytics about plan trends and performance. • Account Certification % • Plan Value • Product Mix • Exercise Activity • ESPP Participation and Behaviors • Performance Plans Screenshots are for illustrative purposes only. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  22. Tell it Like it Is: Plan Analytics for Management Business Objective What’s Interesting Provides clients a snapshot of the key highlights relating to the equity compensation plans. Focus on metrics that are foundational pieces of information for strategic discussion around effectiveness of equity plans. • Participant counts by product • Award and Exercise trends • ESPP purchase trends • ESPP Plan Design and Participation benchmarking • Customer and Client Service Levels • Participant interaction activity Screenshots are for illustrative purposes only. FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION.

  23. Ownership Guidelines * NASPP 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION. • Ownership Guidelines • 2011 NASPP Stock Plan Administration Survey* indicates that ownership guidelines are hot, hot, hot! • 73% of respondents have ownership guidelines, up from 54% in 2007 • 25% of companies that don’t currently have guidelines are considering implementing them

  24. Ownership Guidelines * NASPP 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). FOR PLAN SPONSOR USE ONLY. NOT FOR PLAN PARTICIPANT DISTRIBUTION. • Ownership Guidelines • Most frequently apply to CEO, CFO, and other named executive officers • Rarely apply below executive level • Usually based on a multiple or percent of base salary • Typically 5-6 times salary for CEO, 2-4 times salary for CFO and other NEOs • Challenges with fluctuating stock price

  25. Questions and Contact Emily Cervino, CEP Emily.cervino@fmr.com 408 832 9080 Fidelity does not provide legal or tax advice and the information provided above is general in nature and should not be considered legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation. Fidelity Stock Plan Services, LLC 642371.1.0

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