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The Employee Ownership Update

Corey Rosen

November 14, 2007

(Corey Rosen)

Repurchase Not Major Driver of ESOP Plan Termination

A new research project on ESOP terminations, performed by the NCEO and funded by the Employee Ownership Foundation, collected data from 23 large ESOP plan administration firms. They reported results from over 3,300 companies. Just two percent of the companies terminated their plans each year, about half the rate of defined contribution plans in general. Of the companies with terminated ESOPs, slightly over half said they terminated their plans in connection with accepting an attractive offer to purchase the company, even though they could handle their existing repurchase obligation well. Only 13% of the companies were doing well financially but could not handle repurchase, while another 13% were in financial difficulty. The remaining 20% of the terminations were primarily caused with other dissatisfactions with ESOP rules.

The study also found that 49% of all companies in the sample were majority ESOP-owned and 40% were S corporation ESOPs. S ESOPs were about half as likely to report that difficulty with repurchase was a cause for plan termination as C ESOPs.

A full report will appear in the NCEO newsletter to be mailed this week.

Useful Analysis of Proposed Changes in Taxation of S ESOP Synthetic Equity in Rangel Bill

Tax reform legislation introduced by Representative Charles Rangel (D-N.Y.) would impose a tax on synthetic equity held in S corporation ESOPs. Larry Goldberg of Sheppard Mullin has created a useful analysis of how the tax would work out on his ESOP blog.

Stewardship-Sequenced Payouts: An Innovative Idea for Bonuses

In an intriguing article in the WorldatWork Journal (4th quarter, 2007), Timothy Clark of George Washington University and Balaji Krishnamurthy, CEO of LogiStyle, propose an intriguing model of paying bonuses to employees ("Executive Stewardship Incentives from Innovative Bonus-Payout Methodology"). The concept is based on a much-praised system developed at Planar Systems when Krishnamurthy was the CEO. The concept is simple: bonuses are paid at LogiStyle when shareholder return targets are met. If they are, then bonuses are paid to lower-level employees until their bonus targets have been met. The bonus triggers cascades up through however many layers of the company the company sets, with the CEO getting a bonus only if everyone else's bonus targets are met. To recognize the additional uncertainty, the size of the CEO bonus could be increased over what it might have otherwise been.

The authors argue that this system is more responsible and a lot more credible to rank-and-file employees and shareholders, both of whom might be willing to accept higher payouts to top executives in good years given the fact that nothing is paid until other stakeholders have been paid. In years that do not meet targets, employees at lower levels might get a bonus. Ironically, when Krishnamurthy left Planar, the new executive returned to a conventional bonus systems, despite investor praise for the old one.

New Article Looks at Five Common Errors in Equity Plan Design in Closely Held Companies

In Five Key Errors in Designing Equity Compensation Plans in Closely Held Companies, I explore some common errors closely held companies make in designing equity plans. Based on conversations with companies considering setting up plans, here are five typical ideas leaders have:
  1. I'm planning to give out 10% of the equity or rights to the equity.
  2. I'm planning to give most or all of whatever percentage I've decided to give up front to those eligible.
  3. Employees will only be able to exercise their awards when the company sells or goes public.
  4. Only key employees will get equity.
  5. I will base the amount each person gets on a percentage of the company that I have heard or read makes sense.

In some cases, one or more of these ideas makes sense. But more often than not, they don't. Read the article to see why and what you can do about it.

Author biography and other columns in this series

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