ESOP / stock option / employee ownership update for August 16, 2005

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Update for August 16, 2005

By Corey Rosen

Cost Accounting Standards Board Proposes New ESOP Rule

The Cost Accounting Standards Board has proposed new regulations on reimbursement for companies sponsoring ESOPs with federal contracts. The issue of what constitutes a reimbursable cost has been tossed back and forth between government regulators for about two decades. The new standards should move towards a final resolution. Under the proposal, "ESOP" would be defined to include any defined contribution plan designed to invest primarily in employer stock. The reimbursement would be for the market value of the shares at the time a contribution is made. The cost would be assignable to a cost accounting period only to the extent an allocation is made to participant accounts by the tax return filing date, including any permissible extensions. For leveraged ESOPs, the allowability of the costs would follow Federal Acquisition Regulation Part 31, which allows companies to charge the costs of principal and interest on an ESOP loan provided the stock is acquired at fair market value. Dividends are allowed as a cost. The regulation does not distinguish in this regard between S and C corporations. Companies operating under an existing approved reimbursement procedure can retain that method or renegotiate under the new rules.

Shell Settles With Employees in Class Action on Employer Stock

Shell has agreed to pay $90 million to settle a class action lawsuit brought by employees who invested in company stock in their 401(k) plan. The settlement joins a growing list of out-of-court resolutions of class action cases brought over declining company stock prices.

Mercer Study Shows Decline in Broad-Based Options, But ESPPs Largely Unaffected

A 2005 survey of 268 large public companies by Mercer Human Resources shows that only 6% plan to eliminate their ESPPs, and only 15% of the companies with plans plan to change them this year, generally by reducing the look-back period or the discount. Fifty-eight percent of the companies have cut back on options. Of these, 71% (or 38% of the overall sample) are cutting back on option eligibility. The data do not allow an analysis, however, of how many of these plans were providing equity broadly to non-management employees.

ESOP Companies Rely on Board Alone to Set Executive Pay

According to an NCEO survey of 204 closely held ESOP companies, 60% of the companies have their entire boards decide on executive pay, while 15% employ outside compensation consultants, and 12% rely on a committee of independent outside board members to make the decision. In another 12%, pay is set by the CEO.

The findings are from data now being analyzed by the NCEO. Beginning next month, we will be able to provide customized reports on levels of executive compensation and incentives based on the survey. Details will be provided in a future update.

University of Wisconsin ESOP Management Program

The University of Wisconsin's Executive Education Center's excellent "Employee Ownership Management Program" will be held October 2-4 in Madison, WI. Details are at http://uwexeced.com/esop/. The program offers an intensive, participative investigation of how to make employee ownership work effectively.

NCEO Members-Only Online Services

The members-only area on the NCEO web site provides a variety of tools for employee ownership companies and providers, including:

A searchable referral service listing hundreds of employee ownership professionals
A searchable archive of previous newsletters
Case studies of companies with ESOPs and companies with stock options or other equity plans
A legislative and regulatory status update
An ESOP and equity plan glossary
A discussion forum where you can post questions to experts
Archives of "The Owners Page," a special report written for employee owners

You can sign up for membership online.

Biography and list of other updates

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