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November 2005. 98 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.
This book begins with an overview of how to share equity with key employees and then discusses general executive compensation issues; special ESOP considerations such as fiduciary issues; using competitive compensation studies; and how to determine appropriate compensation. Finally, this book includes a report on the first-ever survey of executive compensation in ESOP companies. The results strongly suggest that ESOP companies have a much more restrained approach to executive compensation than many of their non-ESOP peers. Executives in ESOP companies make less than their peers in similar non-ESOP companies, both in current and deferred compensation. However, executives also have a substantial stake in the ESOP, something not counted in this survey.
We also have custom executive compensation reports (based on our survey data) available.
Sharing Equity with Key Employees in ESOP Companies
Compensating ESOP Company Executives in the New Regulatory and Accounting Environment
The 2005 NCEO Executive Compensation Survey
Using Competitive Compensation Studies at ESOP Companies
Fiduciary Issues for ESOP Trustees Regarding Executive Compensation
Thoughts on Compensating ESOP Company Executives
The data indicate that while cash compensation is king at most companies, incentive pay can be a significant addition at more than half of the companies. Deferred compensation plays a less significant role. There are, of course, many ways to look at the data, only one of which is presented here. As noted above, the NCEO can provide the detailed data from the survey based on selected parameters so that users can look at each individual response as well as compute means and medians. The data do not, however, allow for the identification of individual company identities, nor are the responses specific enough as to size, percentage of ESOP ownership, and industry to allow a good guess.
How do these data compare to other data on executive compensation? The most comparable large data set we could locate comes from CompData Surveys. These data are not precisely comparable. The CompData survey provides annual cash compensation for companies with employee populations using measurements similar to ours, but they break down incentive pay only by revenues. They also have different assumptions about how pay, such as options, is counted. Tables 3-12 and 3-13 make some simplifying assumptions to come up with very roughly comparable numbers, but the CompData comparison points may be off by a factor of about 10% to 20%. No mater how they are looked at though, the key point is that ESOP company executives do not make nearly as much as comparable non-ESOP company executives.
This comparison is admittedly a very rough one. There may be systematic variations in the kinds of businesses represented in the two surveys, for instance, and the calculations here are not precisely apples-to-apples. They are, however, consistent with what many ESOP advisors say: cash compensation for ESOP executives is somewhat below market. On the other hand, these ESOP executives are often substantial participants in the ESOP and, as noted, often can look forward to six-figure or higher account balances, an asset that few non-ESOP executives would have.
For the most part, ESOP-owned companies are no different than other employers who have the desire to assess the competitiveness of their management compensation programs. It is important for any employer that undertakes a competitive compensation study to understand that the study is only the starting point in determining pay levels. Other factors must be considered, such as the employee’s experience, institutional knowledge, leadership skills, tenure, industry experience, marketing skills, and job performance, along with the perceived risk that the employee may leave the company and the associated replacement costs. The employer must also consider its own competitive and marketplace circumstances.
ESOP-owned companies do have some unique considerations. To begin with, the employer maintains an ESOP. In many cases, the annual ESOP benefit provided to employees may be well above market for retirement plan benefits. We are often asked whether the ESOP should be included in the LTI analysis for management compensation. Our answer is an emphatic negative. The ESOP is clearly a retirement plan and should be treated as such and not included as part of the LTI or any other part of the compensation analysis. Having said this, the ESOP benefit is clearly a factor that an ESOP employer should consider in setting its compensation philosophy and determining the appropriate level of competitive compensation.
Copyright © 2005 by The National Center for Employee Ownership (NCEO) (phone 510/208-1300; email nceo@nceo.org; WWW http://www.nceo.org/). All rights reserved.
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