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The Employee Ownership Update

Corey Rosen

May 5, 2004

(Corey Rosen)

New Study Sheds Light on Executive Compensation vs. Shareholder Return

In their new study, "Corporate Governance, Executive Compensation, and Strategic Human Resource Management from 1992-2002," Joseph Blasi and Douglas Kruse of Rutgers University analyzed compensation for the top five executives and corporate performance in the 1,500 largest U.S. publicly traded companies. The study found that executive compensation, most of which has been in the form of options, increased in years when the stock prices of their companies went up. But when Blasi and Kruse examined whether increases in total compensation (again, primarily in options) were related to subsequent increases in stock prices or total shareholder return over the next three or five years, they found a slightly negative relationship. They found the same result when they looked at the ultimate profit made from options exercises as opposed to the Black-Scholes value at grant. The study examined what are technically called "marginal" increases. In this context, that does not mean "small," but rather is a way percentage increases in compensation results in a corresponding increases (or decreases) in company performance. A more complete summary of the study will be available on our Web site in June.

Google and Employee Ownership

Google's unusual IPO has attracted considerable discussion. Google's founders have made it very clear they do not intend to be a conventional company. They insist, for instance, that their already substantial menu of employee benefits will grow, not shrink, no matter what shareholders might think. They also say they are committed to broad employee ownership (Google currently gives all employees options and a stock purchase plan). Here is how Larry Page, Google's cofounder, expresses their employee ownership views: "The significant employee ownership of Google has made us what we are today. Because of our employee talent, Google is doing exciting work in nearly every area of computer science. We are in a very competitive industry where the quality of our product is paramount. Talented people are attracted to Google because we empower them to change the world; Google has large computational resources and distribution that enables individuals to make a difference. Our main benefit is a workplace with important projects, where employees can contribute and grow. We are focused on providing an environment where talented, hard working people are rewarded for their contributions to Google and for making the world a better place."

IRS Continues in Hot Pursuit of S ESOP Scams

The IRS is now asking some accounting firms to provide names of any companies to whom they have sold S ESOP corporation tax shelters. The IRS has specified a number of S ESOP transactions as "listed transactions," meaning they are tax dodges with no business purpose that must be reported to the IRS. Legitimate S corporation ESOPs-those that provide most of their benefits to rank-and-file employees-will not have a problem with the new rules, with the exception of a few very small (typically under 15 or 20 employee) companies. But those ESOP set up principally to avoid taxes for key employees are being shut down, and their promoters are now subject to special scrutiny and possible IRS punitive actions.

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