The Employee Ownership Update
April 13, 2005
SEC to Delay Expensing Rules Six Months
The staff of the Securities and Exchange Commission (SEC) has recommended that the SEC commissioners vote to delay by six months the starting date for implementation of requirements that companies must expense options, and the commissioners are expected to soon do so, according to the Wall Street Journal (April 13). The delay applies to public companies and would push back the implementation date from the current requirement that public companies begin expensing for accounting periods beginning after June 15, 2005, to January 1, 2006. An announcement with details on the plan is expected this week. News reports do not indicate whether closely held companies would be given an additional six-month delay as well. These companies already had a later deadline of accounting periods after December 15, 2005. The delay is in response to concerns that the new standards, and additional SEC guidance concerning them, are too complicated to install this quickly.
Using Compensation Surveys Wisely in ESOP Companies
One of the trickiest issues for ESOPs is how to balance executive equity incentives with an ESOP. The problem has become more complicated as more ESOPs become 100% owned by the plan. Aside from compliance issues with S corporation ESOP corporation rules, corporate culture concerns, and financial limitations, companies need to establish that compensation is reasonable. Industry surveys are a good place to start. Various commercial services offer these surveys, as do a number of trade associations. But they need to be used carefully. First, just because something is the norm does not make it reasonable. That also has to be judged in terms of the company's financial position and what the individual executives are required to do to earn the reward. Second, the ESOP provides potentially significant amounts of equity itself. Companies need to asses both how much the executive gets allocated annually as well as how forfeitures may add to these values over time. The beneficial tax treatment of ESOPs also needs weighing. Finally, be careful in how numbers are used. Ideally, comparisons should be made between similar companies in similar areas of the country, or at least with similar costs of living. Narrowing things down this way, however, can result in a small number of comparison companies. Just because a study reports an average of, say, $20,000 annually in stock options does not mean a lot if only three companies are used to create the average. In short, the surveys are useful, but only if viewed with considerable caution.
Survey of Technology Companies Show Changes in Option Plans
A 2005 Top Five survey of 42 major technology companies in Silicon Valley reports that 74% are considering replacing some of their options with other long-term incentive vehicles, with the same number considering reducing the size of their grants. Half the companies are considering reducing eligibility as well. Restricted stock is the most common substitute, being looked at by 55% of the companies. Only 3% of the companies plan to drop their ESPPs, while look-back features and discounts may be reduced--but this is a decision companies have generally not yet made. The results are described in the April issue of WorkSpan, the magazine of WorldatWork.
Communicating ESOPs as Something Other Than a Retirement Plan
Most companies make a point to communicate their ESOPs as a retirement plan. But most ESOP participants will get distributions well before retirement. While it is appropriate for companies to advise employees to think of ESOP distributions as part of their retirement planning, the truth is that many employees will spend at least part of the distribution when they get it. So why not communicate ESOPs as a wealth-building plan? Wealth can be used for retirement, of course, but it can be used in other ways as well. This approach makes the plan more immediate while also making it clear that there are some risks.
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