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The Employee Ownership Update

Corey Rosen

November 17, 2006

(Corey Rosen)

Court Takes Expansive View of ERISA Presumption That ESOPs Should Invest Primarily in Company Stock

The recent spate of "stock drop" cases has focused mostly on 401(k) plans, but some of the companies had ESOPs as well. Courts have generally adopted the Moench v. Robertson doctrine that investments in company stock can be presumed to be prudent unless the company is in serious difficulty. In Pedraza v. Coca-Cola Company, No 1:05-cv-1256-ODE (N.D. Ga. Sept. 29, 2006), a case involving a combination ESOP-401(k) plan, a district court strongly agreed with this standard. Coca-Cola stock dropped about 33% from the late 1990s until 2005, but the court ruled that the fiduciaries for the ESOP portion of the plan would have only had to remove and/or stop buying shares "in the case of a company on the brink of collapse." The court also dismissed the claim that the 401(k) portion of the plan should not have offered company stock as one investment option, saying that the plan documents required it.

Options Use Continues to Decline

According to a report from Pearl Meyer & Partners based on a study of public stock filings, the largest 200 U.S. companies have reduced the use of options to a median overhang of 12.9% of outstanding shares. New annual equity awards were only at 1% of shares outstanding, about half what they were five years ago. Restricted stock, however, has shown a tenfold growth from its relatively low level six years ago. These numbers need to be evaluated carefully, however. Six years ago, hardly anyone used restricted stock, and it still is a distinct minority of overall equity compensation.

A new PriceWaterhouse global survey of large companies found that only 60% offer service-vested stock options, down from almost 100% in 2003. Nineteen percent of the companies said they were reducing the size of grants for all staff. Most companies said they were replacing the awards with restricted stock. Perhaps most surprising, the study found that the number of U.S.-based employers offering employee stock purchase plans (ESPPs) dropped from 70% to 46%, a much larger decline than other surveys have found. Copies of the study, PwC 2006 Global Equity Incentive Survey, are available by calling 720-931-7341.

More Evidence That Kelso Was Right as Workers' Share of GDP Continues to Shrink

Back in the 1950s, Louis Kelso, the creator of the modern ESOP, argued that the share of economic growth ordinary workers would capture from their labor would shrink over the next decades, while returns to capital would far outpace economic growth. Economists said Kelso was deluded. It turns out the economists were deluded. According to Labor Department data, the salaries of non-management employees have fallen to an inflation-adjusted 10% below their 1970s levels. In the last five years, the U.S. Bureau of Economic Analysis found that despite strong economic growth, the share of GDP going to wages and benefits dropped 2.5%. Meanwhile, the stock market has continued to rise at an inflation-adjusted 8% or so per year. An article in the New York Times on this subject (Oct. 15, 2006) says economists are still perplexed and insist this trend, so counter to classical economic theory, is bound to go back to the normal pattern of wage and benefit growth tracking GDP growth. Kelso, by contrast, argued only by making workers into co-owners of capital would they ever be able to keep up or move ahead.

Kiplinger Urges Spreading Ownership to Employees Broadly

Knight Kiplinger, editor in chief of the widely read Kiplinger letters, has urged that to fix excessive CEO pay, companies should start spreading ownership to all employees. Kiplinger says his "personal favorite" approach is the ESOP, but he would also favor granting options to all employees. Kiplinger cited NCEO data showing that companies that do this perform better. The column, "Better Options for CEO Pay," in available at

NCEO Board Elections

NCEO members can now nominate themselves for the NCEO board. The term is three years. Expenses are not paid, but the annual conference fee can be waived. There is one required annual meeting, the afternoon before and morning of the annual conference. Periodic call-in meetings are also held, and many board members volunteer for advisory committees to provide input into NCEO projects. Submit nominations no later than December 15, 2006, for the January 2007 elections. Email a 100-word-or-less statement of why you are qualified to serve to Statements longer than 100 words will not be accepted.

Author biography and other columns in this series

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