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The Employee Ownership Update

Corey Rosen

March 18, 2008

(Corey Rosen)

Study Shows Investors Largely Ignoring Options Impact on Accounting in Tech Sector

An October study by Thomas Weisel Partners, an investment banking firm, found that 53% of sell-side analysts use only non-GAAP reporting in their analyses of 50 leading technology companies. All but one of the companies provide non-GAAP statements. The 2006 changes to stock option accounting that required costs to be expensed at grant would show up only in the GAAP report. The report is one more indicator that the accounting reforms are having less impact than was expected when they were implemented. At the time, companies worried that this reporting would be an important investor focus and would significantly hurt their share prices. So far, there is no persuasive evidence that that has happened, and the Weisel report indicates that many investors are not even bothering to look at the information. Ironically, it is still common to hear advisors urging companies to find ways to minimize the apparent impact of equity plans on their income statements, even though there is not much reason to think it has any effect on share prices.

The Power of Ten

ESOP companies perform substantially better when they get their employees involved in making decisions about everyday work issues. When a lot of people are coming up with a lot of ideas, the impact on the bottom line can be dramatic. Jerry Gorde, the founder of ESOP-owned VATEX, a supplier of embroidered and imprinted promotional materials, provided a telling example at a recent meeting. "Our industry runs by dozens," he said. But a dozen is an awkward number ("Quick," he said, "how many is 27 dozen?"). Inaccuracies in box counts were causing a high rate of returns, an expensive proposition in a low-margin business. So employees suggested shipping by tens instead. Errors dropped substantially and profits grew significantly.

The VATEX example perfectly illustrates an NCEO maxim about the relationship between employee ownership and corporate performance. Getting people to work harder (trying to work faster with fewer distractions on counting by dozens, for instance) adds only a little to the bottom line; giving people the tools, incentives, and structures to make smarter decisions adds a lot.

Employee Ownership Growing in Europe

According to Marc Mathieu of the European Federation of Employed Shareholders, in the 2,500 largest European companies there are now 8.2 million employee owners holding 260 billion Euros ($406 billion) in assets.

Survey of Large Private Companies Explores Equity Plan Use

As part of a broader survey of 300 privately held companies with $100 million in revenue or more, WorldatWork and Vivient Consulting report that only one-third of the surveyed companies have some form of long-term incentive plan. Of this one-third, one-third have stock options, 19% have restricted stock, and 14% have stock appreciation rights. About 25% of these companies have more than one plan, so about half of the one-third of private companies with long-term plans have some form of equity compensation, or roughly 17% of the total sample. Of this group, about half have 10% or less of their equity available for equity compensation, while 35% have 10% to 25%, and 14% have 25% or more. Sixty percent of the companies use independent appraisers to determine value.

Companies provide liquidity in different ways. For options, half allow exercise on a change of control, half allow it at retirement, and a third have some kind of internal market (some companies have more than one way to provide liquidity). Restricted stock is less likely to be paid out at retirement. The median ownership by CEOs where there are equity plans is 5%, all other officers another 3%, and everyone else 10%. Generally, companies limit eligibility to CEOs and top officers, but 14% provide it to at least some hourly employees and about the same percentage to non-management employees other than hourly.

The survey was of WorldatWork members with revenues from $100 million to $5 billion, so the results may not be typical for most closely held companies. Complete results are available at WorldatWork's Web site: go to www.worldatwork.org and enter "incentive pay practices" in the search box.

State of Employee Ownership 2008 Now Available

Each year, the NCEO publishes an issue brief on the state of employee ownership. The brief reviews current data on employee ownership plans, describes the various kinds of plans available, discusses what we now know about the relationship between employee ownership and corporate performance, and briefly reviews recent legislative, regulatory, and individual decisions on the topic. We have just released the 2008 brief, which is 26 pages long (see here for a table of contents and excerpts). Copies are available to NCEO members for $15 and to nonmembers for $25.

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