The Employee Ownership Update
September 27, 1999
S Corporation Reform May Be Added to Tax Extension BillA revised version of the S corporation reform legislation that was included in the tax bill that passed Congress earlier this year (and that the President vetoed) may be resurrected in a bill to extend popular tax deductions and credits now working its way through Congress. The new legislation would retain the previous bill's language providing that allocations of stock to people who (1) collectively own 50% or more of the company's shares and either (a) own 10% or more of the ESOP shares or (b) with their family members own 20% or more of the ESOP shares would be subject both to income tax and an excise tax. It would add, however, a new provision providing a 50% excise tax on ownership attributable to certain individuals whose ownership is evidenced indirectly, such as through options. The precise language is being worked on as this is written.
It is still far from certain this will become law, however. The provisions must first be accepted by both houses of Congress, the larger bill must pass, and the president must sign it, all of which are uncertain.
New NCEO Survey on Stock Option Plan DesignIn conjunction with TriNet VCO, a venture capital resource company in San Leandro, CA, the NCEO recently conducted a survey on stock option plan design in companies receiving venture capital financing. The study focused specifically on emerging growth companies with venture capital backed financing, annual employment growth rates of 30% or greater, and a professional/technical workforce. The on-line survey was conducted from December 1998 through April 1999 of TriNet clients who have stock option plans. It was designed to mirror the larger 1998 NCEO "Current Practices" study. Of the 187 companies asked to participate in the survey, 31 respondents completed the survey for a 16.6% response return rate. The companies ranged in size from 10 to 200 employees and were from across the US, although a majority (69%) were from the San Francisco Bay Area. The concentration of companies in the Bay Area reflected the client base of TriNet and not necessarily the distribution of venture capital backed companies in the US.
Nearly all of the companies (83%) grant new-hire stock option awards to all of their employees, while the remaining 17% made grants to key employees only. The average value of new-hire awards varied considerably by pay. For employees making between $110,000 to $150,000, the new hire option value (the number of shares of stock underlying the option award times the share price on the date of award) was $110,433; for employees making between $30,000 and $50,000 received awards worth $5,515.
Slightly over half (16) of the companies surveyed use ongoing award programs for their employees. Of those companies that use ongoing award programs, 68% make grants annually and the remainder make grants on a discretionary, quarterly, or other basis. The value of the ongoing awards ranged from approximately 25% to 100% of the new hire awards.
A detailed look at the results of this and the larger 1998 NCEO survey on stock option plan design is contained in the latest printing of our book Current Practices in Stock Option Plan Design.
Options Growing in IndiaThe software industry in India is starting to use broad options in a number of companies. In the September 27th issue of The Wall Street Journal, Infosys is profiled in a cover story about Indian software gurus. The company gives options to most of its 4,000 employees; one-third of them are now rupee millionaires and 106 are dollar millionaires. A waiter in the company's conference room earns $106 a month, but his options have allowed him to buy land and a motorcycle so far.
Author biography and other columns in this series