Navigating US Dollar Employee Stock Ownership Plans (ESOPs)
Shares, options or RSU's are a common way for US-based companies to pay employees who work in offshore subsidiaries. Maximise your holdings by avoiding high currency conversion costs.
In response to globalisation, many U.S. companies have expanded their empires and now run large subsidiary businesses outside of their home country. There are now many Australians that work for companies whose parent company is based in the U.S.A. One of the common rewards with working with a U.S. parent-based company is that part of your salary package can be US shares, options or RSU’s.
These are offered as long-term enticements for your loyalty to stay with the company and high performance. Often this is bundled up and called an Employee Stock Ownership Plan (ESOP) and is provided even though you are not a U.S. citizen. Many would agree that these are good employee benefits and would accept the offer. But what does this all mean when you are an Australian citizen? And how do you realise the value and bring back the money to Australia at a time when you want?
What is the purpose of an ESOP?
Being part of an Employee Stock Ownership Plan means that you as a company employee can have a part ownership interest in the business. There are several different ways a company can roll-out an ESOP, from issuing shares, options and RSU’s, to granting the option to purchase the company’s stock using after-tax deductions from their pay. The EOSP assets are usually allocated each year to participating employees and are a common form of motivating and rewarding the company’s workforce. ESOP’s are generally designed to benefit employees who remain with the employer the longest as usually the assets will need to vest over a period of time.
What is the difference between a share, an option, and an RSU?
A share is a unit of ownership in a company. Often also called ‘stock’ and the two words are used interchangeably depending on the context. You can buy or sell shares anytime when the trading desks are open.
An option is a contract that gives you the right to buy or sell the stock at a specific price by a specific date. Therefore there is an expiration date for an option.
An RSU is a Restricted Stock Unit and typically are common stock that vests over time, often over a 4 year period. This means the company that provides the RSU has a commitment to give the value of a specific number of the company’s shares in the future for which payment is not usually required. The RSU’s must vest before the RSU recipient can receive the promised value. If your job ends then the RSU’s usually stop vesting.
How do I realise the value of the assets provided in the ESOP?
Essentially you need to sell your company shares or stock. This means either waiting until your RSU’s have vested which might have been provided as cash or stock, or you exercise your options and sell. When you sell your shares within a company this is always handled by a brokerage service and can be a division within a financial institution or a platform that manages shares for a company (e.g. Merrill Lynch, Solium, HSBC, local banks). Often when you have an ESOP your company will already have an arrangement with a major company to help you manage the sale of your assets and any subsequent repatriation.
How do you bring back USD to Australia?
Now you have sold your shares overseas and have money sitting in a U.S. account. What do you do next and how do you bring this money back home to Australia? Often there will be an option provided by the brokerage or platform that sold your shares of using their service to transfer the money to Australia. These firms typically offer a fixed (usually poor) exchange rate and perhaps also charge a transaction fee. These costs will be on top of the fees charged by your local Australian bank to receive and process an international money transfer. Taken together, these charges could reduce your final transfer amount by a couple percent. This means less dollars in your Australian bank account!
Instead of just going with the brokerage or firm your company partners with, shop around to make sure that you are getting the best value for your USD conversion. You’ll likely find there are better, more affordable options out there. Using an online transfer service, like FlashFX, ensures a simple process, a great exchange rate and no transfer fees.
What are the tax implications for ESOP’s?
Hmmmmm we don’t pretend to give tax advice when we can’t. Needless to say it can be confusing. Best to ask a registered Australian tax agent for the full implications of participating in ESOP’s your obligations when selling any assets.
Make the most out of your Employee Share Plan
ESOP awards are an important component of compensation and can represent a meaningful percentage of an employee’s pay package. If your company awards these incentives in USD, it is important to understand the process and potential implications of repatriating these funds back to Australia. You deserve to recoup the maximum amount of your share proceeds, regardless of what currency they were issued in. Take the time to research whether the brokerage or firm that your company is using to help you sell and convert your money is truly offering the best value. FlashFX is an Australian-based money transfer company that has helped countless Australians save on transaction fees and exchange rate margins when converting USD to AUD. Check us out today to see how much you can save.