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The Employee Ownership Update

Corey Rosen

August 31, 2007

(Corey Rosen)

ESOPs Improve Performance in Closely Held Companies, But Results Are Mixed for Public Companies

A new NCEO issue brief on the performance effects of ESOPs reports that research consistently shows they improve performance in closely held companies but have a less clear impact in public companies. The issue brief summarizes the research on this topic over the last two decades, focusing on those studies with "before and after" designs that most effectively address a key research question: do ESOPs actually cause performance improvements or are they merely associated with such improvements?

The data on closely held companies shows, in each study, that industry-indexed performance generally goes up in the years after an ESOP is set up relative to industry-indexed performance in the years before, usually in the range of 2% to 3% per year. This change is greatly enhanced by combining ESOPs with an ownership culture that includes information sharing and employee involvement in work-level decisions. ESOPs have a neutral to negative effect when these management practices are not present; similarly, when these management practices exist absent ownership, their impact is less dramatic. The main source of competitive advantage is not the ESOP or management practices but rather the combination of the two.

In public companies, some studies show modest performance gains while others show modest declines. The differences may be a function of the time periods studied, as public companies have used ESOPs for different reasons over the years. The major use for ESOPs in public companies all along has been to help fund 401(k) plans, but in the late 1980s, many large ESOPs were set up to help fend off takeovers, while in the late 1980s and early 1990s, there were a number of large ESOPs set up in troubled trucking, airline, and steel industries. The differences may also trace to differences in methodology or just random variation. In any event, few public companies see employee ownership as an integral part of their corporate culture. By contrast, private company ESOPs have been consistently used primarily for business transition and are much more likely to be explicitly linked to a high-involvement culture.

To learn more about the report, see our issue brief on Employee Ownership and Corporate Performance.

New Data on Who Gets Stock Options

A 2007 Bureau of Labor Statistics survey indicates that about 8% of all private sector employees (about 9 million people) have stock options. This is down from 9% in the 2006 survey, but the survey does not track the movement away from options to other individual equity plans, such as restricted stock and stock appreciation rights, which have replaced broad-based options in some companies. The survey indicates that 14% of managers and professionals receive options compared to just 2% of service workers and 5% of workers in mining, construction, and maintenance. Workers in other categories fall in the 8% to 10% range. Twelve percent of employees making over $15 per hour received options, compared to 5% of those making less than $15. Workers in other categories fall in the 8% to 10% range. Thirteen percent of employees in companies with over 100 employees get options, compared to 4% in companies smaller than this. Most geographic areas fell close to the national average, but 11% of the workers in the Pacific region received options, compared to just 5% in the East South Central region.

While the data show a predictable skewing towards higher-paid and managerial employees, they also show that millions of relatively low-paid employees, as well as non-managerial employees across all occupations, are also receiving options.

Private Letter Ruling Suggests C ESOPs Can Go Over 25% of Pay Limit

In PLR 200732028, the IRS ruled that a C corporation ESOP can contribute up to 25% of pay to cover principal payments on an ESOP loan, plus contribute up to 25% of pay in addition if the contributions are not used to repay either principal or interest on the loan. The combined contributions must be within the individual annual addition limits under Section 415. This ruling follows the same logic as a prior ruling allowing such combined limits for ESOPs and profit sharing plans. The IRS said that the law under which this is allowed does not apply to S corporation ESOPs. Private letter rulings apply only to the company requesting them, but the language here makes a strong case the IRS would rule the same way in other cases.

NCEO Book Club

If there is sufficient interest, the NCEO will start a management book club. Any member could suggest a book for interested people to read. Thoughts and reviews would be posted on the Web site in the members' area, and a conference call could be arranged to discuss the book. If you are interested, please contact Corey Rosen at 510-208-1314 or

Author biography and other columns in this series

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