The Employee Ownership Update
April 25, 1997
IRS Raises Doubts about Travelers Stock Option/401(k) PlanThe plan by Travelers Group to contribute stock options to its 401(k) plan is getting another look from the IRS. The IRS had initially given the first-of-its kind plan a favorable private letter ruling, but it now is reexamining the issue. Under the Travelers plan, the company would contribute stock options with a value equal to 10% of pay into employee 401(k) accounts each year. Pay over $40,000 would be ignored, however. The options would vest immediately, but could only be exercised 20% per year. Employees could only exercise the options if they remained employed. Unexercised options would lapse. Travelers would take a deduction on the contribution equal to a computed fair market value of the options at the time they were contributed.
The IRS came under considerable pressure from companies that provide options to employees to reverse the ruling. The companies were concerned that Travelers would want to value the options at as high a price as possible in order to maximize the deduction. That could put pressure on other option-granting companies to value their options at a higher price, something that would show up in a footnote on their income statement and possibly hurt shareholder perceptions of their earnings. At the same time, it appears some people in the IRS were concerned about the fact that Travelers was taking a deduction for options that might ultimately never be exercised. A ruling is expected in the next few months. The Travelers plan generated considerable interest, but companies now will have to wait for the IRS response.
McKay Nurseries Wins Business Enterprise Trust AwardMcKay Nurseries, a wholesale and retail nursery in Waterloo, Wisconsin, has been named a winner of the Business Enterprise Trust award for 1997. The award is given to four individuals and companies each year by a foundation created by Norman Lear and based in Stanford. Winners receive a lot of publicity, meet with the President, and are written up as Harvard Business School cases. The award is given to companies who find ways to combine successful business operations with meeting social objectives.
McKay is the fourth NCEO member to win the award in the last five years (Springfield ReManufacturing Corp., Community Health Care Associates, and Hannah Anderson are the others). It employs over 100 migrant workers who work about six months each year. Rather than just take whoever comes, McKay has made a concerted effort to encourage people to return every year. It provides good housing and pay, training, and, most important, participation in the company's ESOP. The ESOP, set up 13 years ago, owns 100% of the company. Typical annual contributions to the plan from the company equal 20% to 25% of pay. All employees working 1,000 hours in a year qualify, which means most of the migrant workers are included.
The results have been impressive. The company has an astonishing 90% retention rate for its migrant employees, whose average tenure is 15 years. It has quadrupled in size since the ESOP was set up, and employees in the plan since its inception have six-figure account balances.
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