Digitization has become indispensable in recent years with respect to a company’s ability to reward employees effectively while meeting today’s complex and ever-changing tax and payroll compliance obligations. At the same time, the impact of employee mobility on the long-term incentive compensation process has demanded significant attention in order to enhance efficiency and accuracy in that area of business.
Amid the growing complexity of global mobility and the movement of ever-increasing numbers of employees, being able to accurately track and manage assignments and compensation is making increased reliance on technology and digitization’s unprecedented advantages inevitable. With companies managing hundreds or thousands of global moves today, traditional paper-based tools and processes have become entirely impractical compared to new digital capabilities that offer reliable and instant access to tax-related data. At the same time, many nations are becoming more stringent in requiring real-time reporting on data and taxes, further driving the need for global firms to make the transition to digital tools.
While tax authorities are making use of technology to improve how they assess risk and boost tax processes and collections, this is especially true in the context of long-term incentive compensation such as stock options and other forms of equity incentive. Tax authorities continue to issue guidance and legislation specific to such incentives, and many have actively pursued compliance through audit. As a result, most companies have implemented processes to manage their multi-country reporting and withholding obligations for mobile employees.
While tax authorities are making use of technology to improve how they assess risk and boost tax processes and collections, this is especially true in the context of long-term incentive compensation.
Embracing technology to solve today’s issues
A number of companies have taken a practical approach to this compliance issue, implementing automated processes that are transactional — starting and ending at vest or exercise and focused solely on settlement. This approach has proven reasonably effective at managing risks and achieving timely award delivery to participants. But many such processes have remained static, addressing just compliance. Mobility impacts much more than settlement, and a practical approach, in most cases, does not fully support all functional stakeholders and operational requirements. This is especially true for companies with large global footprints and significant mobile-employee populations.
Technology and companies’ experience continue to move forward, and with this, the ability to address the compliance issue that was once the key focus is typically considered a given.
More and more global companies are therefore looking to design an effective reward process to address all issues surrounding long-term incentives at every stage of the mobility life-cycle.
More and more global companies are therefore looking to design an effective reward process to address all issues surrounding long-term incentives at every stage of the mobility life-cycle, recognizing that a practical approach that has proven successful regarding compliance will not be fit for the future. The main issues to be addressed are stakeholder pain points, which largely boil down to awareness for both employees and business units, while ensuring accurate tax compliance.
Large global companies with mobile employees recognize that technology can be an enabler to address these issues. Companies are therefore embracing the use of technology solutions to address these issues holistically, typically covering the following key components:
Employee expectations continue to evolve with technology, including the desire for simple, real-time access to clear information in all aspects of their lives. To address this, companies may leverage the instruction process previously run at settlement only, to model the expected future tax obligations for all outstanding awards prior to a move and share this with the participants. More-frequent communication may also be included, such as an annual or real-time refresh to consider new awards, as well as fluctuations in share price and exchange rates. The result is not only clarity for participants but the opportunity to address concerns proactively, prior to a move.
The single biggest compliance risk for many companies with long-term incentives is ensuring payroll processes have correctly met reporting and withholding requirements. To address this, many companies carry out audits of a sample of instructions. Such an approach will never ensure complete global compliance. The only effective way to do so is via technology. Some companies make use of automated systems to fully validate and reconcile 100 percent of their multi-country payroll instructions, eliminating this risk altogether.
The data gained from such reconciliations can also be analyzed to enhance training for payrolls and other stakeholders.
Like tax authorities, business units don’t like surprises — especially when the surprise is unexpected costs that have not been budgeted for. Companies are increasingly turning to advanced data and analytics capabilities to provide estimates of potential future costs to finance teams and line management. This is particularly helpful where, for example, a tax-reimbursement cost may arise on a stock-option exercise for an ex-assignee who left the business many years ago. Completing this analysis on a quarterly or annual basis to consider new assignments and new awards ensures an enhanced budgeting process and greater understanding and trust in the numbers.
The world continues to change and with it so must businesses and their processes. This is especially true for global companies, which must be agile to respond to ever-evolving needs from their stakeholders. Employee reward, and in particular processes surrounding long- term incentives for mobile employees, is just one such example. Continuing analysis of data and trends is needed in order to react to the changing world. A commitment to continually reviewing and improving processes is key.
Our recommendation to global businesses looking to the future today is threefold on the subject of digitization and mobility:
Increase your focus beyond compliance to include other stakeholders and employees and their specific requirements as you evolve.
Actively engage all stakeholders.
Bring stakeholders throughout the organization — such as employees, finance teams, line managers and payroll teams — into the digital transformation process from the start to ensure buy-in and efficient transitioning.
Sustain your progress.
Continually review and enhance processes to ensure they remain fit for purpose.
Overall, embracing the use of technology is crucial for global companies to effectively address such a complex area. This is not just to ensure tax compliance, but key to making use of data and analytics in ways that position companies to make more-informed and strategic decisions regarding design of their reward plans and to attract and retain the best talent around the world.
KPMG in the US
T: +1 212 954 1811
KPMG in Switzerland
T: +41 58 249 62 79