The ESOP Repurchase Obligation and Stock Value

Should the ESOP repurchase obligation affect stock value? More and more trustees believe it should. Not to reflect this value means the ESOP is arguably overpaying for shares of departing employees because the company's projected earnings do not reflect the emerging obligation. That means most participants end up worse off in the long run. But some other advisors argue that an outside buyer would make the obligation go away, and it is the outside buyer who is the theoretical buyer in calculating fair market value. Valuation consultants are also split on the matter. At the NCEO, we strongly believe, and have for years, that the repurchase obligation should normally be reflected in value (although there are some exceptions), but, in any event, ESOP fiduciaries need to look at this issue carefully.