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The Employee Ownership Update

Corey Rosen

October 13, 2006

(Corey Rosen)

409A Deferred Compensation Requirements Postponed Until Next Year

Unable to come up with final regulations in time for companies to implement changes by the end 2006, the IRS has postponed the effective date of new deferred compensation requirements under Internal Revenue Code Section 409A until the end of 2007. Final regulations are expected by the end of 2006. Deferred compensation plans, however, must comply in good faith with the statute. Formal amendments must be made by December 31, 2007. Participants can make new payment elections through that time. Participants who previously made an election can still change it. Companies with discounted options and stock appreciation rights can retroactively amend their grant price to fair market value until the end of 2007 except for public companies required to restate their earnings because of backdated options for Section 16 insiders. The new rules are contained in IRS Notice 2006-79.

Most Companies with "Best Bosses" Share Ownership Widely

Winning Workplaces, a nonprofit organization dedicated to helping organizations create great workplaces, recently named 18 companies winners of its annual "Best Bosses" competition. Fourteen share ownership broadly with employees. Eighty companies applied; one of the winners was ESOP-owned SmithBucklin, which also won an Innovation award at the recent NCEO/Beyster Institute annual conference. Details on the winners can be found at www.winningworkplaces.org.

Major New Research Confirms Interactive Power of Ownership and Involvement

On October 6-7, the Russell Sage Foundation and the National Bureau for Economic Research (NBER) held a two-day session in New York to discuss the results of a multi-year NBER research project on "shared capitalism" (employee ownership, profit sharing, and gainsharing). Richard Freeman of Harvard and Joseph Blasi and Douglas Kruse of Rutgers led the research project. Additional papers on other data sets were also presented. The meeting was keynoted by Daniel Kahneman, a Nobel prize winner for economics, who helped developed "prospect theory," a major breakthrough in economics that shows, among other things, that people are much more concerned about a dollar's loss than a dollar's gain and are willing to sacrifice economic gains to assure fairness between parties, concepts that violate classical economic principles of economic "rationality." (The NCEO has often discussed the importance of these concepts to understanding how employees view employee ownership.)

The common theme running throughout the research findings was that employee ownership, as well as other forms of "results sharing" (i.e., rewarding employees based on positive corporate performance), affects employee attitudes and corporate performance primarily when it is paired with employee involvement programs such as work teams, open-book management, and similar practices. The NCEO identified this pattern in our first major research project in the 1980s, and it has subsequently been confirmed in other work. Organizational behavior scholars such as former NCEO keynoter Ed Lawler also made these arguments many years ago, but economists and the investment community, by and large, have paid them little heed, paying precious little attention to how organizations treat ordinary employees as predictors of corporate success. Given the prestige of the Harvard-based NBER, this conference may be an initial step in gaining more academic credibility for an alternative view.

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