The Employee Ownership ReportConcisely written for leaders in employee ownership companies and for service providers in the field, the NCEO's bimonthly newsletter, the Employee Ownership Report, is the most efficient way to stay informed about legal issues, current events, best practices, breaking research, management approaches, and communications ideas for employee ownership companies.
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Read a sample issue of the entire newsletter (September-October 2015).Sample Article from the January-February 2016 Issue:
Employee Ownership Q&A
ESOPSQ. I am working to determine what the ideal contribution to our one-year-old ESOP should be. Whose responsibility is it to determine the year-end contribution? I am also grappling with the impact of contributions on employee motivation vs. paying off the loan too fast.
A. First, the board is responsible for determining the contribution, although in many companies management plays a central role, either because of substantial overlap between management and the board or because management makes a recommendation that the board reviews and generally approves. The decision is often subject to constraints. One of the most common is the repayment schedule for the ESOP-to-company loan (if there is one). The repayment schedule for an ESOP-to-company loan may be on a different schedule than a bankto- company loan. Companies should generally think about those as two separate decisions, since repaying the bank (or other third party) is what gets you out of debt, and the ESOP repaying its loan is what allocates shares. For companies that are exploring an ESOP, be sure the structure of your transactions allows you the flexibility to treat these two loans in your company's best interest.
Another constraint is the statutory limits on contributions. The general limit is 25% of payroll. If the ESOP is leveraged and is in a C corporation, contributions to the ESOP count separately from other contributions to qualified plans, as well as to cash contributions made to the ESOP for reasons other than repaying the loan. So the 25% limit applies only to what is needed to repay the ESOP loan, not the aggregate of all contributions.
In terms of motivation, two numbers are most important: one is the contribution relative to payroll, and the other is account balances relative to payroll. In a young ESOP like yours, the second number won't be very impressive yet, so I'd encourage you not to frame this entirely in terms of current value. This is a good time for people to get a sense for the trajectory of the ESOP and what will determine the future value of their accounts.
In terms of resources, there is some useful comparison data in our executive compensation survey, which also has data on ESOP contributions. The median ESOP company in that survey contributes 10% of payroll, and half of companies (from the 25th to the 75th percentile) contribute between 5% and 19%.
You can get more details in the members area of our website, and you can refer to our book on executive compensation.
Q. We recently adopted an ESOP. We have not amended our corporate documents to reflect that change. Are there some changes we should consider in our bylaws or articles of incorporation?
A. It is possible that your bylaws will not require any changes as a result of being an ESOP, but there are some changes you should consider:
- Some companies include language documenting an intent to remain employee-owned into their bylaws, which they use as part of their response package to offers to buy the company in order to screen out non-serious offers.
- If your bylaws specify board committees, you will likely want to add an ESOP administration committee.
- You may want to allow board action by written consent or otherwise revisit the process by which board meetings are called. Having a very clear process will be more important than it was, should there ever be a conflict between the trustee and the board.
- For the same reason, you may also want to explore the process by which shareholders can take action.
- Many trustees recommend using the occasion of an ESOP transaction to do a review of the bylaws and articles of incorporation, simply as good housekeeping, since laws, regulations, and best practices change.
Q. Are direct administrative costs paid for by the plan or the plan sponsor?
A. It is typical for an ESOP document to state that the expenses associated with administering the plan will come from the trust, but that the company may pay those expenses without that payment being construed as a contribution to the plan.
EQUITY COMPENSATIONQ. What is the accounting treatment for stock options and other equity compensation?
A. Effective for accounting periods beginning after December 15, 2005, companies must account for all equity compensation on their income statement. For stock options, companies must calculate the present value of an option at grant and record that as a charge against income. A variety of formulas, such as Black- Scholes, are available to do this. Most other equity compensation, such as restricted stock, phantom stock, and restricted stock units, are accounted for as a charge to income as they become vested, adjusted to reflect changes in its value over time, and changes in the vesting percentage.