Using Compensation Surveys Wisely in ESOP Companies

One of the trickiest issues for ESOPs is how to balance executive equity incentives with an ESOP. The problem has become more complicated as more ESOPs become 100% owned by the plan. Aside from compliance issues with S corporation ESOP corporation rules, corporate culture concerns, and financial limitations, companies need to establish that compensation is reasonable. Industry surveys are a good place to start. Various commercial services offer these surveys, as do a number of trade associations. But they need to be used carefully. First, just because something is the norm does not make it reasonable. That also has to be judged in terms of the company's financial position and what the individual executives are required to do to earn the reward. Second, the ESOP provides potentially significant amounts of equity itself. Companies need to asses both how much the executive gets allocated annually as well as how forfeitures may add to these values over time. The beneficial tax treatment of ESOPs also needs weighing. Finally, be careful in how numbers are used. Ideally, comparisons should be made between similar companies in similar areas of the country, or at least with similar costs of living. Narrowing things down this way, however, can result in a small number of comparison companies. Just because a study reports an average of, say, $20,000 annually in stock options does not mean a lot if only three companies are used to create the average. In short, the surveys are useful, but only if viewed with considerable caution.