The Employee Ownership Update
August 27, 2001
Temporary AMT Relief Bills Introduced in CongressRichard Neal (D-MA) and Zoe Lofgren (D-CA) in the House and Joseph Lieberman (D-CT) in the Senate have introduced parallel legislation that would curtail the tax on incentive stock options exercised in 2000 and subject to the Alternative Minimum Tax (AMT) in 2001. The legislation would limit AMT to the difference between the option exercise price and the share price on April 15, 2001, or, if the stock were sold before then, the amount realized on the sale. Thus, someone who exercised an option in 2000 at, for instance, $10 per share on shares worth $50, but then sold the shares (or held them on April 15th) when they were only worth $15, would only owe AMT on $5 per share, not $40 per share, as would be the case under current law. The bills are limited just to options exercised in 2000; sponsors of both bills have other legislation to exempt incentive options from the AMT on a permanent basis.
While the bills are attracting some support, they will have to compete in a crowded tax reform environment in a time of disappearing surpluses.
New Studies Show Positive Impact of Employee Ownership in Korea, ChinaTwo new studies show that employee ownership seems to have a positive impact on corporate performance in both Korea and China. Employee ownership has gained important footholds in both countries, although in very different ways.
ChinaIn China, employee ownership is being used primarily as a means to transform township and village enterprises (TVEs). In China, most companies are still owned either by the central government or the townships and villages, although more private enterprises are being started. These local governments can be very large, encompassing millions of people. The central government owns the country's very large and politically sensitive businesses, but most of the country's non-private enterprises are owned by local governments. In the last several years, thousands of these have been partially or wholly turned over to private hands. There are no reliable data on how often this has happened through employee ownership, but, at least in some regions, it is apparently very common.
In the Zucheng region of Shandong province, researchers George Tseo at Pennsylvania State University-Hazleton, Zhang Pen-zhu at Xiang Jiatong University, and Zhang Liu and Hou Gui Sheng at Qingdao Institute of Chemical Technology, found that 248 enterprises had been sold entirely to their employees by 1994. The Zucheng model is apparently fairly typical of how employee ownership proceeds in China. Employees buy the company through mandatory stock purchases. The stock, however, usually does not appreciate in value nor does the investment usually pay interest. Instead, the purchase is more like buying a membership in a cooperative. Employees receive a share of company profits (averaging about 25% per year in most of the companies in the study), but any excess retained earnings are owned collectively, providing an extra cushion for the company. New employees would also have to become owners. The idea is to retain employee ownership long-term. Employees generally have governance rights in both the state owned enterprises and in the cooperatives, generally through some kind of worker assembly, although management usually seems to dominate the board election process in both kinds of companies. Both state owned and employee owned companies have a variety of forms of employee involvement in other aspects of day-to-day management, but the prevalence of these forms does not vary based on ownership status.
The researchers compared the performance of these employee owned companies to state owned enterprises in the region, as well as a smaller sample of companies in the more distant Xian region. They also looked at employee participation and financial information sharing programs. The researchers found that the employee ownership companies outperformed the SOEs on a profitability measurement, and that about 15% of the difference could be attributed to employee ownership. Employee ownership was the most important correlate of performance the researchers measured.
KoreaIn Korea, stock ownership follows a much more conventional model. There, employees buy stock much as they would in an employee stock purchase plan in the U.S. Starting in 1968, Korea has required that employees be given the right of first refusal on varying amounts of stock in public and private company new offerings. Over the ensuing years, many changes were made in the operation of these plans, including providing employees with a 15% tax credit on the purchase of shares and various tax deductions for employers and employees. Shares were held in an employee stock association and generally could only be withdrawn after seven years, except for special needs situations. In 1997, these benefits were rescinded, but this year Korea has created the framework for a new employee ownership law. Under the new law, companies will be able to make tax-deductible contributions to employee ownership plans, and, like leveraged ESOPs in the U.S., will be able to borrow money to buy shares, repaying the loans in pretax dollars. Employees will also be able to purchase shares on a tax-favored basis. Details of the new law need to be developed before it becomes effective next year. There is still considerable skepticism about the concept of employee ownership, however, from both the corporate and union sides.
In a study of employee ownership in Korea, Beom-cheol Cin of Kyonggi University and Steven Smith of George Washington University found that by 1997, one million employees owned stock in Korea's publicly traded companies, with 76% of eligible employees participating. The mean employee ownership, however, was only 1.8% of shares, a decline from 2.4% in 1996, before the Korean economic crisis and the demise of the tax benefits. The study found that employee ownership is a statistically significant contributor to productivity, with an increase in employee ownership from, for instance, 2% to 3% suggesting productivity would grow about 2.6% to 2.7%.
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