Solving the Challenges of a Global ESPP

When SAP decided to implement a worldwide ESPP, they were faced with the same challenges that any multinational company faces. But unlike many companies, SAP’s ESPP overcomes these challenges in very unique and innovative ways.

For a recent NASPP Equity Expert podcast, I interviewed Sandra Sussman, SAP’s Director of Global Equity Design and Strategy, about their ESPP. For today’s blog entry, I summarize what I learned from Sandra.

Own SAP: The Plan

SAP’s ESPP is unique in several ways. Here are the key features of the plan:

• Like any ESPP worth its weight in compensation expense, it has a catchy name: Own SAP.
• It’s a nonqualified plan.
• Employees contribute between 1% to 10% of monthly base salary.
• The plan offers a generous 40% match, instead of a discount (capped at €6,000).
• All employees below the executive level get an additional €20 subsidy.
• Employees purchase stock monthly.
• Once employees purchase the stock, they own it freely. There are no holding requirements or vesting conditions.

Why a Match?

A match is really a discount by another name. Either way—match or discount—employees end up with shares that are worth more than what they pay for them. A 40% match works out to be a discount of about 29% off the purchase date FMV (not taking into account the cap).

Some of the advantages of a match are intangible. The idea of a match may resonate more with employees (in the context of 401(k) plans, I often hear the match referred to as “free money,” something that is rarely said about discounts offered through ESPPs or other stock compensation programs). Shareholders also may feel better about a match, since employees are ostensibly paying full price for the stock. 

In SAP’s case, the match serves two very practical purposes. First, the plan is an open market plan, so letting employees buy the stock at a discount isn’t possible. Second, it facilitates tax withholding.

What About Tax Withholding?

One of the biggest challenges in offering an ESPP globally is that some countries require taxes to be withheld on the spread at the time of purchase. Ditto for nonqualified plans, both inside and outside the US. But with the match, SAP simply collects the tax withholding at the time that employees’ corresponding contributions to the plan are deducted from their pay. All of the necessary withholding is handled through payroll. In Sandra’s words: “The result is wonderfully, beautifully simple.”

Why the €20 Subsidy?

Another challenge for global ESPPs is that, as a result of differences in local economies, some employees simply aren’t paid enough to participate. The flat €20 subsidy that SAP provides to all nonexecutive participants addresses this concern. Although €20 (currently about $22) might not seem like much here in the US, Sandra notes that for some employees, the subsidy can double their monthly contributions.

Why a Nonqualified Plan?

Well, as a German company, SAP likely came to the plan design table without the bias for a qualified ESPP that a US company might have. But I think it’s more than that. Several of the key features of Own SAP wouldn’t be possible in a qualified plan.

Even though a 17.6% match delivers the same benefit as a 15% discount, it’s questionable whether a match is permissible under Section 423. I wouldn’t recommend this approach in a qualified ESPP without a letter ruling from the IRS blessing it.

Moreover, a subsidy that is available to only some plan participants is clearly not permissible under Section 423, even if the participants who don’t receive the subsidy are executives. You can exclude Section 16 insiders and highly compensated employees from a qualified ESPP, but if you let them participate, they have to participate on the same basis as everyone else.

Don’t get me wrong; I’m still a big fan of qualified ESPPs. But the allure of a nonqualified plan is strong. Imagine being free of the restraints of Section 423, of not having worry about the $25,000 limit, of not having to track dispositions or file Forms 3922. Admit it, you’re a little tempted too. And, for companies who have a large population of employees outside the US, why should tax advantages that benefit only one segment of your employees drive your design decisions?

More Info

Want to know more about Own SAP? Check out the podcast I recorded with Sandra. 

P.S.—The Form 3921 that I ordered from the IRS (see “A Government Shutdown Doesn’t Shut Down Your Stock Plan”) finally arrived on January 30. That’s 18 business days after I ordered it and eight business days after I should have received it. But it does seem like they got through the shutdown backlog quicker than I expected.