A Cross-straits Comparison and Analysis of Equity-based Compensation

The release of Taiwan's new Statement of Financial Accounting Standards No. 39 – Share-based Payment (SFAS 39), with application expected to begin in 2008, set the stage for an upsurge in employee stock options from Taiwan-based corporations. However, with China's economy across the straits continuing its torrid growth, the passion of Taiwan-invested enterprises for mainland IPOs has also increased. This article will therefore make a comparative analysis of equity-based compensation measures in mainland China and Taiwan in terms of the accounting treatment and taxation involved in implementing them.

Main implementation differences

• Methods are more diverse.
  
  Under the "Measures on the Administration of Stock Incentive Plans of Listed Companies" ("Incentive Measures") issued by China's Securities Regulatory Commission, in addition to stock options (including employee stock options), available measures include the use of restricted stock; however, Taiwan's current regulations have yet to be amended or supplemented, so that in plans involving employee stock bonuses, limits may not be placed on when they are sold. As a result, restricted stock is still not a compensation option in Taiwan.

• Targets of stock incentives include directors, supervisors.
  
  The "Incentive Measures" stipulate that the targets of equity-based compensation incentives include public company directors (not including independent directors) and supervisors, but in Taiwan directors and supervisors are not employees as defined in "Criteria Governing the Offering and Issuance of Securities by Securities Issuers" ("Issuing Criteria"), and so cannot be recipients unless they also serve as employees of the company in question.

• The upper limit on shares for employee compensation is lower.
  
  The amount of stock in a public company's fully effective cumulative equity compensation plans may not exceed about 10% of its total share capital. (The limit is 15% in Taiwan as long as the exercise price is not lower than the closing price of the underlying stock on the issue date; if it is lower, the limit is 5%.) Without a special resolution of the shareholders' meeting, any one recipient of equity incentives may not receive in cumulative option compensation more than 1% of the company's total share capital.
  
  Taiwan's "Issuing Criteria", besides restricting the number of shares individuals may receive on a given occasion to less than 10% of the total shares issued at that time, also limit the options that can me exercised in a given accounting year to a certain ration.

• Subscription prices
  
  
  • Restricted stock: The mainland's "Incentive Measures" do not regulate share subscription prices, so they are generally free.
  • Other equity compensation: The exercise price may not be below the higher of (a) the closing price one trading day before the date on which the draft equity compensation plan is approved by the board of directors; or (b) the average closing price the preceding 30 trading days.

• Lock-up periods shorter.
  
  The "Incentive Measures" state that the interval between the grant date and the exercise date may not be less than one year; Taiwan's "Issuing Criteria" stipulates a full two years. The terms of options are limited to ten years in both cases.

• Opinions required from attorneys, experts.
  
  After a draft equity compensation plan is passed by the board of directors, independent directors are required to express their opinions. In addition, it is necessary to ask for a legal opinion from an attorney, and when necessary, the board can require a public company to engage independent financial consultants to express their opinions on whether the plan contributes to the company's sustained development, and so on. When a plan is revised, the board must do so only with explicit authorization from the shareholders, and the revisions must still be adopted in a shareholders' meeting. In Taiwan, on the other hand, a plan need only be approved by a special resolution of the board, with the same going for revisions.