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The Employee Ownership Update

Corey Rosen

July 28, 2006

(Corey Rosen)

New Estimates on the Number of ESOPs, Stock Bonus, and Comparable Plans

The NCEO has now compiled new data on the prevalence of ESOPs, stock bonus plans, and related plans (plans that function in the same way as an ESOP but that technically do not file as an ESOP). These data are based on what we believe are much more accurate estimating techniques than in prior years. We now would put the number of ESOPs (as of the end of 2005, and continuing into early 2006) as 9,225, with 10,150,000 participants. The full array of data, going back to 1975, is displayed on the Statistical Profile of Employee Ownership page on this site.

These estimates were compiled by the NCEO in 2006 and are based on a different and more accurate estimating technique than what we previously used. We have built in very conservative assumptions in these estimates, whereas prior estimates were based more on anecdotal information. After some years of trying to figure out a more reliable estimating technique, we came up with what is described below.

In the past, we estimated that there were 11,500 plans in 2006 and 10 million participants. We also estimated very little recent year-to-year growth in the net number of new plans. As these more reliable data show, the number of plans is smaller, the number of participants somewhat higher, and there has been year-to-year growth since 1999. Our current estimates are intentionally conservative. Many experts believe that there are more companies that have what they call ESOPs, and essentially operate as ESOPs, that do not file with the government as ESOPs or similar plans. As we explain below, we have made only a very modest correction for this that may somewhat understate the number of plans.

Why the Dip After 1993

While the number of employees participating in these plans has steadily grown over the years, the number of plans grew from 1975 to 1993 and then decreased before starting to increase again (for details, see the tables on the Statistical Profile page). 1993 was a watershed year for ESOPs in public companies. Accounting rule changes in 1992 caused most public companies with ESOPs to drop their ESOPs and use 401(k) plans as a vehicle for contributing company stock instead. So the number of plans dropped significantly. It would seem that the number of participants would have dropped as well, but the Department of Labor (DOL) data described below do not indicate that. The only explanation for this would be, as many consultants have reported, that ESOPs were increasingly being used in larger private companies. In addition, ESOP companies have faster employment growth post-ESOP than before, so their employment numbers would continue to grow.

How the Estimates Were Made

Department of Labor data based on Form 5500 filings were used through 1999, adjusted slightly upwards (5%) for the number of plans to include plans that are not technically ESOPs or stock bonus plans but function like them. (The Form 5500 is a report companies must file with the federal government on benefit plans; these filings are generally accurate, but they do contain a number of errors, omissions, and definitional issues.) We adjusted the number of participants downward somewhat (10%) because there is some double-counting in DOL numbers for companies with more than one plan. (Typically, this double-counting occurs in a public company with both an ESOP and a profit-sharing plan with company stock; as we are counting the data, this would show up as two ESOPs, and if there are, for example, the same 3,000 employees in both plans, it would show up as 6,000 participants.) These estimates seem reasonable to us, but they can only be estimates.

Department of Labor data after 1999 do not provide enough detail to estimate the number of plans and participants. Instead, from 1999 on, we have adjusted the number of plans by adding the net of the number of initial letters of determination issued to ESOPs and stock bonus plans minus the number of termination letters. Note that neither process provides as accurate an indicator as we would like as some companies do not file for one or the other. Additionally, there are variations in the number of letters issued that do not comport with what consultants are telling us about trends. However, it seems reasonably safe to assume some balancing out of these problems between initial qualifications and terminations so that the net number should be a reasonable indicator of growth.

For the number of participants, we have assumed a steady relationship of an average of 1,100 per plan. This was roughly the case in the last DOL data in 1999, and there does not seem to be a reason for it to have declined and some reason to think it may have gone up, so these numbers may be conservative.

New Study Shows Options Usage Up for Executives

Then overwhelming conventional wisdom has been that options accounting rules would dampen the use of options for top executives. Maybe not, it turns out. According to a New York Times article (July 17, 2006), a new unpublished study by H. Nejat Seyhun of the University of Michigan based on SEC filings finds the percentage of public companies using options for their top executives has not declined. More surprising, perhaps, is that the average number of options issued in grew 24% in 2005 over 2004, and is higher than any year in the past four. The number of companies issuing options in 2005 on the major exchanges was 3,963, down about 25% from the peak in 2000 of 5,625. But Professor Seyhun says that is misleading because there were simply a lot more technology companies on public markets at that time, and many of them are now gone. In fact, the percentage of technology companies issuing options is exactly the same as it was in 2000.

The study is based on filings with the SEC for equity awarded to top executive officers, so the data cannot be extrapolated to indicate what is happening to options use more broadly within the workforce.

Twenty-Nine Percent of Companies May Have Backdated Options

According to a new study by Eric Lie and Randall Heron, 29.2% of companies issuing options to executives and/or directors between 1996 and 2002 have grant date patterns that suggest backdating or other manipulative practices (such as "spring-loading," the announcement of a grant before good news is released), and 23% of options issued to executives appear to have been backdated or spring-loaded. The pattern was somewhat more common in technology companies, smaller companies, companies granting options to more executives and directors, and companies with higher stock price volatility. Volatility is especially significant: 29% of companies with high volatility appear to have manipulated grant dates, compared to 13% of those with low volatility. New rules under the Sarbanes-Oxley Act have reduced the practice to 10% of the companies granting options. Only 7.7% of companies filing within the new two-day reporting window for options grants show a pattern of backdating, compared to 19.9% of companies that did not meet the requirements. The results focused on the 51% of the grants during the period that were unscheduled and at-the-money. A separate analysis of grants issued at other than the current price of the shares at grant also shows a pattern of manipulation, but it was only about 60% as prevalent for this type of award (these awards were not very common at the time, however, because of adverse accounting rules). More telling, only 0.9% of the scheduled grants showed a pattern of fortuitous timing, strong proof that the pattern in unscheduled grants could not be the result of random variation.

House Passes Pension Reform Bill

On July 28, the House passed a pension reform bill approved by a House-Senate conference committee. If the bill is passed by the Senate, employee ownership plans will be affected in a number of ways, as outlined below.

Among the many provisions in its 907 pages, the bill provides rules that allow companies to provide outside investment advice for 401(k) plan participants and to allow for automatic enrollment with an "opt-out" provision for 401(k) and similar plans.

Author biography and other columns in this series

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