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The Employee Ownership Update

Corey Rosen

May 15, 2007

(Corey Rosen)

Zions Bancorporation Completes Successful ESOARS Auction

On May 8, Zions Bancorporation successfully completed its auction of Employee Stock Option Appreciation Rights Securities (ESOARS). ESOARS are traded securities meant to track the value of employee stock options the bank has issued. Employees had received options at a strike price of $83.25. The lowest price paid for the ESOARS was $12.06 per unit. Twenty-one of the 43 bidders had their bids accepted. The ESOARS auction is being used to establish an accounting value for employee stock options the company has issued. Investors were asked to bid on a security whose value will track the actual value the options deliver to employees over time. The clearing price indicates a lower value for employee options than alternative option valuation methods would likely have yielded. Zions argues this method is more accurate because it uses the market to test how much buyers would be willing to pay for securities that have the same rights and terms as the options the employees are receiving.

New Data on ESOP Persistence over Time

A new analysis by the NCEO shows that of the ESOPs set up in the 1970s, about 20% still survive today, while about 40% of those set up in the 1980s do, and more than half of the ESOPs established in the 1990s still exist. While that rate of termination may seem alarming to some, other data show that ESOP companies are more likely than comparable non-ESOP companies to stay in business over time and that ESOPs themselves are terminated at roughly the same rate as other kinds of retirement plans.

Employee Turnover Has Not Changed Much in Last 25 Years

The conventional wisdom holds that employee turnover has grown over recent decades. Whereas employees often sought and got lifetime jobs in the past, this wisdom holds, now they tend to move around much more.

It turns out that this is largely myth. In fact, according to new data from the Employee Benefit Research Institute, turnover has barely budged since 1983. The median tenure for private-sector workers was 3.9 years (in other words, half the workforce had been on the job four years or less). For the oldest male (but not female) workers, tenure is somewhat shorter. For those between 54 and 64, median tenure declined from 15.3 years in 1983 to 9.5 years in 2006. This same result, however, shows that few people ever held lifetime jobs, with even the oldest workers with the longest tenure typically starting their current jobs in their forties.

We do not have comparable detailed data for companies with employee ownership plans, but the data we do have indicate that job tenure rates are significantly longer than industry norms and that the percentage of employees who say they plan to look for new jobs is much lower. Given the now strong evidence of how costly turnover is, this gives these companies a significant financial edge.

Errata: Example of ESOP Diversification in Last Newsletter Issue Incorrect

In the last issue of the newsletter, our math was wrong in the example of how to diversify in an ESOP. In the second bullet point in the example, the text should read "So now the calculation is 25% of 1,100 shares, or 275 shares eligible to be diversified. But 250 were already diversified, so it is 25 shares more that can be diversified." To review, the rule is that in the years after the first year of diversification, you take all the shares that have ever been allocated to an employee's account (or acquired after 1986 for some plans), multiply by 0.25, then subtract the number of shares already diversified. We apologize for the error.

Measure the Strength of Your ESOP Culture: Quick Survey for ESOP Participants

Through June 30, the NCEO is offering members access to an eight-item questionnaire assessing employee attitudes toward ESOPs that their employees can fill out online. Faster and far less expensive than our full-service employee surveys, the mini-questionnaire gives you a snapshot of ESOP understanding and ownership culture, with comparisons to how other companies did.

Special NCEO Webinar June 18: Jack Stack on A Stake in the Outcome

Jack Stack has arguably been the most influential employee ownership company executive of the past 30 years. His leadership of SRC Holdings (formerly Springfield ReManufacturing Corporation) and his creation of the Great Game of Business have led hundreds of ESOP companies to rethink how they do business. Employee ownership companies following the model he has created have performed significantly better than would have been expected on many dimensions. Jack will share his exceptional insights into how to make employee ownership work on Friday, June 18.

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