Two Questions to Consider When Processing Trailing Stock

Friday, August 24, 2018 | Treasury

Offering stock options as an employee benefit is a long-standing practice that many organizations across the world have adopted as a standard recruiting perk. The practice enables those organizations to attract and compete for top talent, retain talent and encourage an “ownership” mentality across its work force. While the practice has become commonplace, the process can be challenging, especially when it comes to processing an employee’s “trailing stock” in your global payroll organization.

Trailing stock is stock that was awarded to an employee in one country but vests after the employee has transferred to another country and is no longer on the original, offering country’s payroll. That vested stock is taxable, but since the employee is no longer on that payroll, the processing becomes challenging.

Let’s offer an example:

Bill works for Company A and is on the U.S. payroll. Bill is awarded a restricted stock unit and two years later gets transferred to Company A’s Singapore office. Because of this transfer, Bill is then removed from the U.S. payroll and opened on the Singapore payroll. Approximately one year later, his U.S. stock vests, Bill collects his $2,000 USD and now owes $500 USD in taxes.

How is trailing stock processed?

The simple answer is Company A must convert the tax liability to Singapore dollar and process it through that specific payroll. So, continuing with the example, the tax amount (or percentage) is first figured in USD since that’s where the stock originated. Then, that $500 liability will be brought over to the Singapore payroll and converted into Singapore dollars. Next, you must deduct the converted amount from Bill’s paycheck, process it on his employee record and transfer the payroll records back to the U.S. office for payment.

How is my payroll vendor going to process trailing stock?

The tricky part here is that most global payroll organizations use multiple vendors for different entities, so it’s likely the U.S. payroll is processed by one vendor and the Singapore payroll is processed by another. In this situation, the processing slows as it is not done in real time. The U.S. vendor would need to create the employee as a new starter, process the payroll, make the deduction and then transfer those payroll records to Singapore. Then, the following month, Singapore converts the currency, makes the necessary deductions and then pays it to the U.S. office through something like a cross-invoice between the two companies.

When using separate vendors for your global payroll, these three extra steps cause processing trailing stock to be cumbersome and delayed:

  • The processing typically cannot happen in the same pay cycle. The pay out of the tax liability occurs in one month but can’t be collected until the following month.
  • The U.S. entity has to re-open the original employee record or create the employee as a new starter, because he is no longer linked to the system.
  • The cross-invoice between the two legal entities must be processed by both parties.

Another potentially big issue with multiple vendors arises in the reporting phase. Can each vendor process and report consistently? Is the reporting separate or combined? And what about the stock value, taxes due and conversion into the second currency? Can both vendors align as well as capture all the variables and requirements in the same report? With multiple vendors, the likelihood for inconsistencies and different formats increases, further complicating the process.

The iiPay difference.

Utilizing a single vendor, like iiPay, who can process payroll across all countries, simplifies and speeds up this process. With iiPay, the processing can happen within the same pay cycle, the employee is paid sooner and there’s no risk of error from the crossover from one vendor to another.  And about that reporting issue?  With the process remaining within iiPay from beginning to end, your reporting will be correct and comprehensive, including all of the variables within one report.

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