The Employee Ownership Update
November 1, 2005
Internal Equity and Executive PayDespite increasing unease with the levels of top executive compensation, a recent WatsonWyatt/WorldatWork study shows that 73% of large companies want their top executives to be at or above the median compensation levels for their industries. As Ed Woolard, former CEO at DuPont and chair of the New York Stock Exchange's executive compensation committee recently argued, this can only lead ever upwards: "CEO pay is driven today primarily by outside consultant surveys - and the fact that many board members have bought into the concept that your CEO in your company has to be at least in the top half, and maybe in the top quartile. So we have the 'ratchet, ratchet, ratchet' concept. We all understand it well enough to know that if everybody is trying to be in the top half, everybody is going to get a hefty increase every year." The full speech is available online.
Woolard, along with a growing number of industry groups focusing on executive pay (most notably CompensationStandards.com), propose instead a concept of "internal equity," in which more emphasis is placed on how executives are paid relative to other people in the company. The Committee for Effective Employee Ownership (CEEO), a project of the NCEO, the Beyster Institute, and the Global Equity Organization, also argued for this approach in its position statement last year. As the NCEO's recent data on executive compensation in ESOP companies showed, ESOPs, in general, seem already well in tune with this concept.
Employer Stock in 401(k) Plans DropsA new, definitive study of employee investments in 401(k) plans shows that the percentage of allocations going to company stock has gradually declined from a high of 19% in 1996 to 15% in 2004. Moreover, younger workers are less likely to invest in company stock than older ones. The data are reported in "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2004," issued by the Employee Benefit Research Institute and the Investment Company Institute. Their dataset includes 16.3 million 401(k) participants in 45,783 plans, or about 38% of all private sector employees participating in these plans.
Just under 48% of the participants in the study work for companies that offer company stock in their plans. The list below shows the percentages of plan assets held in company stock by employees of such companies:
- 80% or more: 11.2%
- 40% to 80%: 15.1%
- 20% to 40%: 14.3%
- 1% to 20%: 22.6%
- Zero: 36.7%
IRS Releases 2006 Plan LimitsKey new limits for qualified plans in 2006 will include the following:
- Section 415 annual addition limit: $44,000
- Annual compensation limit under Section 401(a): $220,000
- Maximum amount subject to 5-year distribution period in an ESOP under Section 409(0): $885,000 total amount/annual distribution amount $175,000
- Section 414(q) highly compensated employee definition: $100,000
- Section 401(k) maximum deferrals: $15,000