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Executive Compensation in ESOP Companies
by David Ackerman, Neil M. Brozen, Bruce Grussing, Matt Keene, Camille Kerr, Loren Rodgers, Corey Rosen, Stephen D. Smith, and Christopher Staloch
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The third edition replaces all the material from previous editions with new chapters that reflect the issues facing ESOP companies today.
To get a custom report based on our latest ESOP company executive compensation data, or even to acquire the entire executive compensation database, see our ESOP Executive Compensation Survey Results.
Format: Perfect-bound book, 88 pages
Edition: Third edition (October 2012)
Status: In stock
1. Overview of Executive Compensation for ESOP Companies
2. Legal and Regulatory Issues
3. Fiduciary Issues for Trustees Regarding Corporate Governance and Executive Compensation
4. Sharing Equity with Key Employees in ESOP Companies
5. Valuation Issues
6. Special Issues for S Corporations
7. Using Compensation Studies Wisely
8. The 2012 NCEO Executive Compensation Survey
From Chapter 3, "Fiduciary Issues for Trustees Regarding Corporate Governance and Executive Compensation"The ESOP trustee initially relies on its financial advisor to make an assessment as to the reasonableness of the executive compensation. The benefits offered under the executive compensation arrangements must be analyzed and compared with their dilutive effect on the company stock price to determine whether the compensation arrangements are reasonable and appropriate. In many instances, it is prudent for the ESOP trustee to engage a third-party compensation consultant if the financial advisor believes the executive compensation is unreasonable. The NCEO provides significant survey data that measures the market rate of equity-based compensation for executives in ESOP companies. This applies not only to ongoing ESOPs but also to cases where an ESOP company is being sold.
If one or more officers are being paid excessive amounts for post-sale consulting agreements, this will reduce the amount the ESOP will get on the sale. We know of one case where the proposed consulting agreement for the majority individual shareholder was equal to one-third of the value of the company (determined before the consideration of this agreement). The consulting agreement was for five years (with a substantial death benefit) even though it was discovered that the shareholder had terminal cancer and was not expected to live more than six months after the scheduled closing. The trustees objected, and the sale was not completed. The company was sold a few years later on much better terms.
Sometimes, where the ESOP does not own all of the shares of a company that is an S corporation, boards may want to pay bonuses to the individual shareholders to compensate them for the tax they have to pay on their shares of the income, rather than paying a dividend (which creates a greater outflow of cash), to circumvent the S corporation second-class-of-stock rules. This would be improper and could endanger the S election. The payment of bonuses in this case could be considered as a disguised dividend that does not go to all shareholders. This is not only unfair to the ESOP but also could be treated as creating a second class of common stock that disqualifies the S election.
From Chapter 8, "The 2012 NCEO Executive Compensation Survey"Sixty percent of companies that discussed market levels set base salary around the median, and many of those companies provide variable incentive pay that raises the total compensation above median levels. Companies that use this approach said that it was designed to be competitive in order to attract and retain talent, while also rewarding performance that generates a return for investors including the ESOP.
Approximately 29% of companies that discussed market levels set compensation above the median to encourage retention and what one company called "top-drawer commitment and performance."
The remaining 11% of companies set their base salary below market. One company explained that their intent was to "control compensation in lean times and share rewards in more successful times." Another similarly stated that a below-market wage "allows for more flexibility in the event of a poor performing year." Often, this approach is accompanied by above market incentive pay, especially in "more successful times." Other companies set base pay below market and rely on a "total rewards perspective" to remain competitive, which includes cash compensation, employee ownership and other benefits, along with company culture.
Most respondents that referenced the "market" were referring to comparable companies in their region, industry, or both. Popular tools for determining the market baseline include compensation surveys conducted by states, trade associations, and popular magazines.