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The Employee Ownership Update

Corey Rosen

March 14, 1996

(Corey Rosen)

Proposed Federal Acquisition Regulation Detrimental to ESOPs Withdrawn

A proposed federal acquisition regulation (FAR Case 92-24) that would have limited the ability of government contractors to fund ESOPs has been withdrawn. The proposal would have limited the amount the government will reimburse government contractors for their contributions to ESOPs to 15% of covered pay and would have given no reimbursement on the interest on ESOP loans. The proposed regulation was based on the argument that in many ESOPs, interest payments dwarf principal payments and, in any event, do not release any additional shares to employees. Moreover, some government contractors were concerned ESOPs were being used to acquire other companies or buy out owners, with the government picking up the tab.

The proposal generated considerable opposition in the ESOP community. In an analysis prepared on the issue by the NCEO, we pointed out that in a typical ESOP loan, interest payments generally are only about 50-60% of total principal payments over the loan's term. Moreover, the total cost to the government of a leveraged ESOP and a non-leveraged ESOP acquiring the same number of shares over the same period of time would be about equal.

On March 12th, the General Services Administration, NASA, and the Department of Defense, the three agencies that make acquisition rules, withdrew the proposal.

Delta Pilots Get Options Worth 19% of Company

In return for wage and other concession, pilots at Delta will get stock options worth as much as 19% of the carrier, plus a non-voting seat on the board. Delta joins Southwest in offering options to all its pilots.

Business Week Lauds United, Questions ESOP Growth

In a March 14 cover story, Business Week lauded the progress United Airlines has made as a participative, employee-owned company. The article pointed out how work teams throughout the company have saved huge amounts of money. For instance, a cross-functional team of workers saved $20 million a year by figuring out how to power airplanes idling at the gate without turning on the engines. Sick leave has dropped 17% and workers compensation claims costs are down 30%, both a result of employee team ideas. Operating revenue per worker increased 10% in 1995, while employment increased. Other airlines showed smaller gains on this measure, but accomplished them through massive layoffs. Meanwhile, operating margins doubled and the stock price has gone up 120% since the buyout, compared to 46% for the S&P Airline Index.

United's success has not been widely imitated in other large companies, however. An accompanying article points out that there are few large ESOPs in major firms, and even where there are, the companies have not been as open to employee involvement as United.

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