Equity Compensation for US Executives: What Foreign Employers Must Know

Important notice: This article is provided for general informational purposes only and does not constitute legal, tax, securities or financial advice. Pact & Partners is an executive search firm, not a law firm or an accounting practice. Equity compensation involves securities, tax and employment law rules that vary by country and by state. Always work with qualified legal counsel and tax advisors before implementing an equity plan.

Your top candidate just asked about equity. Her current employer grants it every year, and she will compare your offer line by line. In the US executive market, salary alone rarely wins the argument: candidates want a stake in the value they help create.

But your French holding company is listed in Paris, not on the NYSE. Your German parent is privately held. Your Japanese group has no US listing. You have no obvious mechanism for your American hire to ever turn a stake into cash.

This is the equity compensation problem for foreign employers in the United States. It is not theoretical, it is urgent, and it is solvable.

Our work placing executives in the US for foreign companies has taught us one thing: equity has become a central part of executive recruitment in the United States, particularly in technology and life sciences. In those sectors, an offer without equity often loses the candidate.

Equity compensation is not an HR checkbox, though. It combines tax consequences, securities law, valuation rules and cross-border complications. Get it wrong and you expose the company to compliance problems and your executive to unexpected tax bills. Get it right and you align incentives, improve retention and show that you are serious about American talent.

This guide walks you through the instruments, the pitfalls specific to a foreign parent company, and pragmatic solutions.

Equity Compensation Structures at a Glance

These are common market practices, not legal requirements. Each plan sets its own terms.

Why Equity Matters in US Executive Hiring

In the United States, equity compensation is not a luxury for senior hires: it is an expectation. In technology, life sciences and venture-backed companies, it is the price of admission. At large US public companies, long-term incentives, mostly equity, typically make up the majority of a CEO's target pay, far more than base salary.

Three structural reasons explain this:

First, equity ownership is deeply rooted in US business culture. US capital markets are the deepest in the world, stock ownership is widespread, and private company equity is widely treated as a legitimate wealth-building tool. Many executives see owning a piece of the business as the natural reward for helping it grow.

Second, US tax rules can make equity attractive. Incentive Stock Options (ISOs) carry no regular income tax at grant or exercise; if the holding periods are met, the entire gain is taxed at long-term capital gains rates when the shares are sold. Even for RSUs and non-qualified options, which are taxed as ordinary income, any growth after the shares are received can qualify for capital gains treatment. Combined with the potential upside, this is why a senior candidate often values a well-designed equity grant more than the same amount in cash.

Third, in a competitive talent market, equity signals commitment. If you offer only salary, you are saying "we will pay you fairly for the time you are here." If you offer equity, you are saying "we expect you to build lasting value, and we want you to share in it."

The result: in technology, life sciences and venture-backed consumer goods, candidates at the director level and above frequently decline offers without meaningful equity. This is especially true for roles such as a CTO for your US expansion or a VP of Sales for the US market, who are often leaving unvested equity behind.

Types of Equity Compensation in the US

When people say "equity compensation," they usually mean one of the following instruments.

Stock Options (ISOs and NSOs)

An option gives an employee the right, but not the obligation, to buy shares at a fixed price (the "exercise" or "strike" price) for a set period, typically up to 10 years.

ISOs (Incentive Stock Options): A tax-favored US instrument. There is no regular income tax at exercise, although the spread can trigger the alternative minimum tax (AMT). If the shares are held at least two years from grant and one year from exercise, the whole gain is taxed as a long-term capital gain on sale. ISOs can only be granted to employees, under a plan approved by shareholders, and only the first $100,000 of options (measured by the stock value at grant) that become exercisable in a given year qualify; the excess is treated as NSOs.

NSOs (Non-Qualified Stock Options): More flexible but less tax-efficient. At exercise, the holder recognizes ordinary income equal to the difference between the fair market value of the shares and the exercise price, subject to income tax withholding and payroll taxes. NSOs can be granted to employees, directors and consultants.

A foreign parent can technically grant ISOs to employees of its US subsidiary, but it requires a plan that meets the US rules. In practice, NSOs are often the simpler choice for a foreign employer, and the ordinary income at exercise must be explained clearly to the candidate.

Section 409A and the exercise price: For options and SARs to avoid being treated as deferred compensation under Section 409A of the Internal Revenue Code, the exercise price must not be lower than the fair market value of the underlying shares on the grant date. For a listed parent, the market price provides that value. For a privately held parent, you need a defensible valuation, usually an independent appraisal no more than 12 months old. If the price is set too low, the executive can face income tax at vesting plus an additional 20% federal tax and interest.

Restricted Stock and RSUs

Restricted stock is actual stock granted subject to forfeiture if employment ends before vesting.

RSUs (Restricted Stock Units) are a promise to deliver shares (or their cash value) once vesting conditions are met. No shares are issued at grant.

The tax treatment differs. For restricted stock, the executive recognizes ordinary income equal to the fair market value at vesting, unless they file a Section 83(b) election with the IRS within 30 days of the grant. With an 83(b) election, the income is taxed at grant, on the value at that date, and later growth can qualify for capital gains treatment. The risk: if the shares are forfeited, the tax already paid is not refunded. For RSUs, the executive recognizes ordinary income when the shares or cash are delivered, typically at vesting; an 83(b) election is not available for RSUs.

RSUs are popular with US employers because they are simple to understand and to administer. For a foreign parent, the mechanics are manageable but need planning: the parent delivers its own shares, often through a broker or plan administrator, the US subsidiary reports the income and withholds taxes through US payroll, and the two entities often sign a recharge agreement under which the subsidiary reimburses the parent for the cost of the awards.

Phantom Stock and SARs

Instead of issuing actual shares, the company promises the employee a cash payment tied to the value of the company (phantom stock) or to the increase in that value (stock appreciation rights, or SARs).

Example: Your company is valued at $50 million and is divided into 1,000,000 notional units, so each unit is worth $50 on the grant date. You grant your US executive 1,000 SARs. In year four, the company is valued at $100 million, so each unit is worth $100. The executive receives 1,000 x $50 = $50,000 in cash, taxed as ordinary income.

For foreign employers, phantom stock and cash-settled SARs are often the most practical solution: no shares of the foreign parent are issued, so there is no US securities offering, no shareholder register to change and no foreign shares for the executive to sell. The trade-offs are real, though. The company pays the value in cash, the award is generally accounted for as a liability, and the plan must still comply with Section 409A (a SAR base price at least equal to fair market value at grant, or phantom payouts on fixed dates or events). The valuation formula must also be clear and credible to a US candidate.

How Equity Compensation Differs in the US vs. Europe and Asia

In many European and Asian companies, broad equity grants below the top executive team are less common. Employer social charges on equity can be high, long-term incentive plans often run for three years rather than four, and in Germany, works councils can have co-determination rights over the principles of broad-based compensation plans.

The US differs on almost every dimension:

Taxation: The US offers tax-favored instruments such as ISOs, and post-vesting growth can be taxed as capital gains. Other countries have their own regimes (for example the UK's EMI options or France's free share plans), but those home-country tax benefits generally do not carry over to an executive taxed in the US. A US sub-plan is usually needed.

Vesting and clawbacks: US companies typically vest equity over four years with a one-year cliff. This is market practice, not a legal requirement. Clawbacks are now common: companies listed on a US exchange, including foreign companies with a US listing, must have a policy to recover incentive compensation after an accounting restatement, and many private companies add clawback clauses for misconduct.

Negotiation: In the US, equity is negotiated hard. An executive at the director level or above will negotiate the grant size, the vesting schedule, acceleration on a change of control, the exercise price and the post-employment exercise window.

Liquidity: US candidates expect a plausible path to liquidity. A startup is betting on an acquisition or an IPO. A mature company needs to explain how and when equity can be turned into cash.

Scope of participation: In the US, equity is often offered further down the organization. A senior manager, not only a C-suite executive, may receive options or RSUs.

These differences create a problem for foreign employers: home-country equity practices do not translate directly. For your US team, design around US norms.

The Foreign Employer Problem: When Your Stock Is Not Traded in the US

Assume you are a privately held French design company with $500 million in revenue. You have grown in the US and now have 120 people across San Francisco and New York. You want to retain your US team with equity.

But what does that equity represent? Shares in your French parent company: a private, non-US entity. The executive cannot sell those shares on any market. She has limited visibility on the company's financial statements, which are prepared under foreign accounting standards and not filed with the SEC. She has no way to monetize her stake except through a sale or an IPO of the whole group, which may never happen.

Now multiply this across your US payroll. If fifty people hold options in an illiquid foreign company and no liquidity event occurs, many will see their options approach their 10-year expiry with no realistic way to benefit from them. The impact on morale and retention can be severe.

This is the bind: foreign employers want to offer equity to compete for talent and align incentives, but simply issuing shares of the foreign parent creates securities, tax, valuation and liquidity problems.

Practical Solutions for Foreign Parent Companies

Foreign employers generally choose among four routes, often with their legal and tax advisors in the US and at home.

1. A US sub-plan of the parent's equity plan. Grants of real parent shares (options, RSUs or restricted stock) under a US addendum that handles Section 409A, ISO or NSO status, payroll withholding and US reporting. If the parent is not an SEC-reporting company, grants to US employees under a written compensatory plan can usually rely on the Rule 701 exemption from SEC registration, within annual limits; above $10 million of awards in a 12-month period, the company must provide additional disclosure, including financial statements. State securities rules must also be checked. A parent that reports to the SEC generally registers its plan shares on Form S-8 instead.

2. Phantom stock or cash-settled SARs. Cash awards that track the value of the parent or of the US business, with no shares issued. This is often the fastest route for a private foreign group, as long as the valuation method is credible and the plan complies with Section 409A.

3. A cash long-term incentive plan. Multi-year cash awards tied to revenue, profit or other US targets. Less attractive to candidates who want upside, but simple and fully under your control.

4. A liquidity mechanism. For real shares in a private parent, a documented buyback policy, a periodic internal market or a commitment tied to a future sale gives the executive a credible path to cash, which is what US candidates value most.

Whatever the route, put the key terms in the offer letter: the type of award, its size, the vesting schedule, what happens on a change of control and on termination, and how value will be determined. The same discipline applies to the rest of the package, from relocation packages for US executives to non-compete agreements, which often appear in the same equity documents.

Key Takeaways

• For director-level and C-suite roles in the US, plan for an equity or long-term incentive component from the start, especially when hiring a CFO or a CEO for your US subsidiary.

• Set option and SAR prices at fair market value supported by a credible valuation, to stay clear of Section 409A penalties.

• Check the securities angle before granting parent shares: Rule 701 for most non-SEC-reporting parents, Form S-8 for SEC-reporting ones, plus state rules.

• Consider phantom stock, SARs or a cash LTIP when issuing parent shares is impractical, and explain the valuation formula clearly.

• Give US executives a credible path to liquidity, and route all equity income through US payroll for withholding and reporting.

As an executive search firm, Pact & Partners helps foreign companies benchmark the full package, including equity, and present it in terms US candidates understand, working alongside your legal and tax advisors.