The Employee Ownership Update
February 27, 2007
New Data on Breadth of Employee Ownership in U.S.New data from the General Social Survey show that 20 million American workers own stock in their company through a 401(k) plan, ESOP, direct stock grant, or similar plan, while 10.6 million hold stock options. That means that 17% of the total workforce, but 34.9% of those who work for companies that have stock, own stock through some kind of benefit plan, while 9.3% of the workforce, but 18.6% of those in companies with stock, hold options.
The survey source is the 2006 General Social Survey, one of the largest national surveys on work and other issues. The sample size was 1,242 working adults who were asked very specific questions about their participation in these plans. The survey is a project of the National Opinion Research Center. The analysis and questions were designed by Douglas Kruse and Joseph Blasi of Rutgers University and Richard Freeman of Harvard University for the National Bureau of Economic Research (NBER) Shared Capitalism Project. The project received funding from several sources, including the NBER, the Employee Ownership Foundation, the Beyster Institute, the NCEO, and the Profit Sharing Council of America.
Report Finds ESOPs Generally Improve PerformanceA new review of existing research on ESOPs by Steven Freeman of the University of Pennsylvania finds that the plans generally lead to improved corporate performance, although primarily when combined with high-involvement management systems. Moreover, ESOPs generally are on top of, not in place of, wages or other benefits. Freeman notes that "high profile cases accentuate potential risks through lack of diversification, but most employee-owners are less vulnerable than counterparts." ESOP companies also tend to stay in business longer. ESOPs have little impact on performance in public companies, however, with a number of studies resulting in very mixed results. Public company ESOPs, of course, tend to be dramatically different in structure, financial significance, and cultural relevance than closely held companies.
Freeman finds there is a need for more research on the specific management practices, other than a generally high-involvement work organization, that differentiate one ESOP company from another.
The report was commissioned by the Employee Ownership Foundation, which asked Freeman to provide an unbiased and objective overview of the impact of ESOPs. Copies are available at this link.
Certified Equity Professional Institute Issues Plan GuidanceThe Certified Equity Professional Institute (CEPI) at Santa Clara University has issued the first part of a three-part report on proper procedures for equity plan administration. The 32-page report, titled "GPS: Guidance, Procedures, Systems," brings together leading experts from around the country to develop suggested approaches to the issuance, administration, and oversight of equity programs. The first phase deals with general administration and grant practices. Part two will look at accounting, exercise practices, and tax and payroll issues. Part three will deal with legal issues and employment status. Fidelity Investments funded the project.
ISS Launches Expensing EvaluatorInstitutional Shareholder Services (ISS), which provides guidance on corporate governance and other issues for institutional investors, is making available a reporting system that calculates the compensation expense of stock options according to the Hull-White Lattice model for valuing employee stock options. The model was one of those recommended by the Financial Standards Accounting Board. It incorporates expected employee exercise behavior. ISS criticized current practices in stock option expensing, saying there was enormous variability from the Hull-White model and a median reported expense over 30% lower than the model predicts. ISS laid the blame on too many companies using assumptions too favorable to the company.
Author biography and other columns in this series