The Equity Methods Mailbag—Q2 2026

Thousands of conversations with hundreds of companies each year give our team a wide-angle view into what’s on practitioners’ minds. In this mailbag, we summarize a few recent topics that we find particularly interesting—beyond the basics, but still relevant to a broad range of companies. 

 Once again, we’ve curated these real questions from clients and colleagues, anonymized and refined for clarity. Our goal is to share the practical advice and thinking these questions inspire.

Topics include tax recharging across jurisdictions, option exchange programs, net settlement vs. sell-to-cover, retirement eligibility and FICA, and dividends’ effect on SBC.

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We’ve implemented a tax recharge program in our largest non-US jurisdiction, but we have employees in numerous countries around the world. When does it make sense to start recharging in a certain jurisdiction? 

– Tax Director, retail industry

Setting up your first international recharge agreement is an important milestone. However, what works in one jurisdiction may not work in another, and most foreign jurisdictions require their own separate recharge agreement. Therefore, each jurisdiction must be assessed for its specific costs and benefits. 

The benefits are usually straightforward: receiving a tax deduction for equity compensation delivered to employees, and repatriating cash to the US. Larger foreign subsidiaries with more equity recipients generally represent a larger potential benefit. Even so, there are several factors and discrete costs to consider. Here are a few questions to help guide your analysis.  

Does the jurisdiction provide a tax deduction for equity compensation? The first step is determining whether a local corporate tax deduction is permitted and, if so, whether a recharge agreement is required to claim it. For example, the UK allows a statutory deduction regardless of whether the local entity bears the cost. On the other hand, Canada and the Netherlands generally don’t allow a deduction on equity compensation at all, with or without a recharge. In those countries, the deduction argument disappears, though a recharge arrangement can still make sense to enable tax-free cash repatriation to the US under IRC Section 1032. 

Will the recharge change the employer’s withholding and reporting obligations? In some countries, the local subsidiary has no obligation to report or withhold taxes on equity compensation when the transaction is solely between the foreign parent and the employee. Once a recharge agreement is in place, the local subsidiary becomes directly involved with providing the employee compensation and therefore becomes responsible for reporting and withholding.

In many parts of Eastern Europe, South America, and Central America, a recharge billing can trigger social tax liabilities for both employee and employer. In Brazil, a recharge agreement can change the character of the income. In Mexico, recharging the SBC cost would create employer reporting and withholding obligations at the taxable event. It also may trigger additional taxes for the foreign subsidiary or affiliate in the form of social security. 

What are the compliance requirements for recharging in that jurisdiction? In countries such as France, Germany, and Singapore, there’s a requirement that companies must issue shares from treasury or through direct market purchases (i.e., not issue new shares) in order to qualify for a corporate tax deduction. Other countries like Brazil and China present practical challenges due to strict currency controls. 

Are there considerations for Pillar Two exposure? For companies with consolidated revenue above €750 million, OECD Pillar Two establishes a 15% minimum effective tax rate (ETR) in each jurisdiction. When a subsidiary’s effective rate falls below that threshold, a top-up tax is due. Recharging SBC costs generates a local deduction, but that may be partially or completely moot if the jurisdiction’s ETR is already below the 15% minimum.  

The rules also allow companies to make an election, on a jurisdiction-by-jurisdiction basis, for a five-year period. Under this election, you can use the actual tax deduction (i.e., value at settlement) rather than the default book deduction (i.e., value at grant) when calculating Global Anti-Base Erosion income. Understanding the corporate tax deduction rules in each local jurisdiction is therefore essential when assessing which approach is preferable. 

For more information, please contact us or see our recharge white paper. 

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Most of our employee stock options are deep underwater, which is causing incentive and retention problems while also burdening our share pool with unproductive overhang. We’re considering an option exchange or repricing as we embark on our next chapter as a company. What are the key decision points as we start to think about this? 

– VP, Total Rewards, biotechnology industry 

Programs like option exchanges and repricings are powerful tools to address retention and overhang. But they can come with tradeoffs in the form of cost and external scrutiny. While these programs involve many decisions and steps, the design starts with four interconnected considerations. 

What type of program will be implemented? A true repricing simply lowers the strike price on existing options while keeping all other terms unchanged. By contrast, an exchange swaps one set of awards for a new set that may differ in the number of units, vesting schedule, or other key terms. Both programs address employee incentives and retention. Repricings are the most employee-friendly and simple to execute since they typically don’t require employees to opt in to participate. However, they can carry significant accounting cost and don’t address potential dilution concerns. Option exchanges, on the other hand, minimize or eliminate incremental SBC cost and free up share pool capacity, but they’re more complex to administer (e.g., often requiring a tender offer process). 

Public companies’ shareholders will typically require an option exchange structure. Repricing can be an alternative for private or closely held companies. Both program types typically require shareholder approval, especially for public company stock plans. 

Since an exchange has more design considerations, the remainder of this discussion focuses on exchange programs (although some topics, like participant eligibility, are applicable to repricings as well).  

What will employees receive in exchange for underwater options? In order of prevalence, the most common exchange structures are options-for-options, options-for-RSUs, and options-for-cash. Typically, we see companies align their decision with future equity compensation strategy. 

Companies that expect to continue granting options would likely find an options-for-options exchange to be the right fit. Other companies may have already switched, or plan to switch, from options to RSUs. In those cases, the exchange is a natural moment to pivot. Options-for-cash maximizes share recoupment but burns cash and offers weak go-forward retention if no further service is required (e.g., in the case of vested options). 

Who will be eligible to participate in the program? Excluding top executives and board members from an exchange program is typical, but not universal. Shareholders and proxy advisors prefer these individuals to be excluded so leadership is in the same position as shareholders when shares are underwater. Their inclusion can endanger plan approval or cause downstream say-on-pay or compensation committee voting concerns. That said, the circumstances of the exchange may justify inclusion.  

What’s the exchange ratio? In an option exchange, the exchange ratio is the number of old options that must be surrendered to receive each new option (or RSU). Most programs use a range of ratios applying to different awards that are underwater to different degrees.  

Ratio selection drives a trade-off between employee favorability, accounting cost, and share recoupment. At one end of the spectrum is a one-to-one repricing (maximum favorability, full incremental cost, no recoupment). At the other end is a value-for-value exchange (zero incremental cost, meaningful recoupment, reduced employee favorability).  

In practice, most public companies adopt an exchange structure that approximates a value-for-value framework, accepting some incremental cost for a modest employee-favorable premium. Private companies more commonly run a 1:1 repricing, since their governance and cost concerns often differ from public companies’. 

For more information about getting started with an option exchange or repricing program, see our frequently asked questions on designing a program. 

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We’re reviewing our tax withholding strategy, debating between net settlement and sell-to-cover. The CFO is leaning toward net settlement, so I’m curious: Are you seeing a broader trend of companies moving away from sell-to-cover? We want to ensure we’re not overlooking any significant tax or accounting hurdles. 

– Director, Global Equity, technology industry 

When selecting a tax withholding methodology, companies must balance several interconnected factors, primarily the trade-off between cash conservation and administrative efficiency.  

Net settlement (or net withholding) reduces share dilution and is generally simpler to administer. However, it requires the company to use its own cash reserves to fund tax remittances. Another advantage is that, if the equity plan permits, shares withheld for taxes can be recycled back into the share pool, allowing the pool to last longer.  

Sell-to-cover, on the other hand, avoids a direct cash outlay by selling a portion of the employee’s shares via a broker to satisfy tax obligations. While this method is more cash-efficient for the company, it can introduce market volatility along with significant administrative overhead for cash reconciliations and potential excise tax implications. Employees may also experience a “price gap” if the fair market value on the vesting date differs from the actual sale price.  The tax obligation is determined on the vesting date, so if the price declines before shares are sold, more shares must be sold to cover taxes. 

While net settlement is a standard practice in the US, it’s not always feasible globally. Diverse international tax laws mean that what works in one country may be restricted in another. As a result, sell-to-cover remains the default in many non-US locations.  

Note that you can mix and match withholding methods to suit each region, such as applying net withholding for the US population while using sell-to-cover elsewhere. However, take care not to exceed the maximum statutory tax rate in any jurisdiction since that would trigger mark-to-market accounting. 

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We just had our annual grant, and some of our recipients are retirement eligible. Does that mean FICA taxes are due now? 

– Director, Financial Reporting, health care industry 

The answer depends on the type of awards granted. For time-based restricted shares like RSUs and RSAs, retirement eligibility triggers FICA taxes. If an employee is retirement eligible at grant, then FICA taxes are generally due at grant. 

For performance-based restricted stock, FICA taxes would be due only if the performance condition has been irreversibly achieved and no further service is required. Option-like awards are the notable exception. Because stock options can expire underwater, FICA withholding doesn’t apply upon retirement eligibility. 

Equity compensation is subject to FICA taxes just like other compensation. Under the “General Timing Rule,” withholding occurs when shares are received at exercise for stock options and at lapse for restricted shares. 

But retirement eligibility triggers a different rule. Treasury Regulation section 31.3121(v)(2)-1(2)(ii) introduces the “Special Timing Rule,” which requires FICA withholding as soon as there’s no substantial risk of forfeiture. As a result, when an employee is effectively vested because of retirement eligibility, FICA taxes are due immediately (regardless of when the shares are actually distributed).  

Partial retirement eligibility can also trigger FICA taxes. If a portion of the total shares are effectively earned and no longer subject to a substantial risk of forfeiture, FICA taxes would apply to that portion. 

IRS Announcement 85-113 offers some operational relief to companies. Under the rule of administrative convenience, companies can defer FICA withholdings to later in the year, as long as the transaction occurs by December 31 of the triggering year. This allows companies to batch process multiple events on a single day. That timing is often advantageous because many employees will have already exceeded the Social Security wage base by year-end, reducing the tax owed. 

For more information on the accounting and administrative considerations, see our in-depth issue brief on FICA tax withholding for retirement-eligible awards. 

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Our company is beginning to pay a dividend for the first time. Are there any implications for our SBC expense? 

– Controller, technology hardware industry 

First-time dividends can raise some unique issues in accounting for stock-based compensation. There are two facets that are important to understand: how outstanding equity awards will be treated under current plan documents and what the effect will be on future grants. Note that large special dividends have additional considerations not covered here, such as adjustments to outstanding award sizes and strike prices.

Here are a few considerations to help guide you through the SBC impacts of paying the first dividend. 

Do the current stock award plan documents or individual agreements contain a dividend protection policy?  

Dividend protection means holders of awards are entitled to dividends through dividend equivalent units (DEUs) or cash payments as dividends are declared, typically payable when and to the extent the underlying award vests. If your awards are already dividend protected, then the fair value of those awards already accounts for dividend participation, and no accounting adjustment is needed. 

If the plan indicates that awards aren’t entitled to dividends, you have a decision to make. You can modify outstanding awards to provide dividends or equivalents. Or you can leave the awards unchanged, in which case recipients would receive no dividends and there is no modification or incremental cost to consider. 

If you elect to modify outstanding awards, the change qualifies as a Type I modification under ASC 718 since the probability of vesting is the same as it was before. The incremental cost is the present value of dividends expected to accrue over the remaining vesting period. That cost is amortized prospectively over the remainder of the service period. We cover this in more detail in our Q4 2025 Mailbag article.

What, if any, adjustments will be made to stock options?  

Most of the time, options don’t participate in dividends. This means a dividend-paying stock is worth less to an option holder than a non-dividend-paying stock. The Black-Scholes model captures this effect by reducing option fair value as the dividend yield assumption increases.

You should model and understand the effect on option values and expense. If the value of foregone dividends is material, you may want to reconsider granting options.

How will the dividend impact SBC expense for future grants?  

The answer depends on the dividend protection policy for new grants going forward. If they’ll be dividend protected, there’s no change from current practice. The fair value per share will simply be the stock price. If they won’t be dividend protected, the per-share value will be lower as the present value of forgone dividends must be deducted from the grant-date stock price.

Ultimately, understanding the terms of your plan, and making intentional decisions around modifications before the first dividend is declared, can help manage both the accounting complexity and the recipient experience.

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