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The Employee Ownership Update

Corey Rosen

May 30, 2002

(Corey Rosen)

Nasdaq Approves Shareholder Approval Rules for Stock Option Plans; NYSE Considering Even Tougher Rules

The Nasdaq stock exchange has passed a rule that would require more stock option plans to seek shareholder approval. The New York Stock Exchange is expected to follow suit with similar rules. A Nasdaq press release notes that its current rules "generally require shareholder approval for all plans in which officers and directors participate." The rules exempt plans in which a majority of the participants are not officers or directors. In its new rules, shareholder approval would be required for all plans in which directors and/or officers participate. The rules preserve an existing exemption for plans that provide "inducement grants to new executive officers, but conditioned such grants upon the approval of an independent compensation committee or a majority of the company's independent directors." ESOPs would be exempted from the new requirements, however.

The New York Stock Exchange has proposed stricter rules, requiring that all new equity compensation plans have shareholder approval. Presumably, this would include ESOPs and well as stock options and other plans. Moreover, could only vote on customer shares if they had specific directions from customers on those shares. Brokers traditionally have been more likely to support management. The proposal is still subject to comment and could be changed before a final vote, probably later this summer. Both the NASDAQ and NYSE proposals, which are part of larger proposed changes on corporate governance, would then be submitted to the Securities and Exchange Commission for further review and comment.

Meanwhile, Sen. Carl Levin (D-MI) has introduced the Shareholder Bill of Rights (S. 2460) that, among other things, requires shareholder approval for any plan in which employees receive stock options unless these plans are treated as an expense on the company's income statement.

Hewitt Study Says Option Use Will Drop in Large Companies

A survey of 202 large US companies by HR consulting firm Hewitt Associates has found that 34% plan to decrease the proportion of employee compensation represented by options and other company stock, while 52% plan to keep the level the same, and 14% plan to increase it. At the same time, companies are increasing the use of discounted or no brokerage fee stock purchase plans. Twenty-eight percent of the companies plan to increase their use, 16% will keep them at the same levels, and 56% will maintain current usage. The study also found that employers are increasing their education around company stock issues.

The shift to discounted purchase plans, such as Section 423 plans, makes sense in a volatile market. These plans typically allow employees to buy stock at a discount off the price at the beginning the of a "purchase period" or the end, whichever is lower, with purchase periods usually between three and 27 months, depending on the plan. Employees put money aside out of payroll deferrals during the purchase period, and can choose not to buy stock at all and get their money back. These plans provide less risk for employees in that it guarantees at least some benefit from stock ownership.

The study's complete results are available only to those taking the survey.

18% of Community Banks Have ESOPs

A new survey by Grant Thornton International finds that 18% of community banks have ESOPs. Seven percent offer stock options, but very few of these offer them to below the management level. ESOPs are more prevalent in community banks than in any other industry.

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