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The Employee Ownership Update

Corey Rosen

September 15, 2008

(Corey Rosen)

New NCEO Survey Looks at Use of Equity Compensation Plans in Private Companies

Data on equity compensation practices in closely held companies is hard to find. What data sets that do exist are generally based on client responses or are limited to the high-tech sector. With support from E*Trade Business Solutions, Two-Step Software, The Great Game of Business, and Allecon Stock Associates, the NCEO has now completed a survey that gathers responses from 80 non-ESOP companies and 54 ESOP companies, representing a wide range of industries and company sizes.

We found that 67.5% of the non-ESOP companies used stock options, with 27.5% using restricted stock and 23.0% using stock appreciation rights or phantom stock. ESOP companies were much more likely to rely on stock appreciation rights or phantom stock (56.9%), with 41.2% using options, and 26.1% using restricted stock.

While almost all executives receive equity awards in non-ESOP companies, 29.3% make hourly employees eligible as well and 61.3% make salaried employees eligible. Companies in the West are more likely to make hourly employees eligible (50% do so), as are technology and health care companies (40%). Eligibility is not the same as actually receiving awards, but 56.3% of companies actually make grants to 75% of those eligible. ESOP companies reported a broad distribution of equity, but it is not clear if ESOP respondents misread the question (which asked only about non-ESOP equity), so the results are somewhat suspect.

The results for how much people actually get were surprisingly modest. The tables below show details:

Last year's equity compensation as a percentage of base pay (non-ESOP companies)
0-5%6-10%11-15%15-20%Over 20%
Executive (n=75)49.3%16.0%8.0%9.3%17.3%
Managers (n=69)65.2%17.4%7.2%8.7%1.4%
Salaried (n=68)75.0%11.8%5.9%7.4%0.0%
Hourly (n=57)89.5%7.0%1.8%1.8%0.0%
Last year's equity compensation as a percentage of base pay (ESOP companies)
0-5%6-10%11-15%15-20%Over 20%
Executive (n=50)22.0%18.0%12.0%8.0%40.0%
Managers (n=49)32.7%22.4%14.3%12.2%18.4%
Salaried (n=49)49.0%16.3%18.4%8.2%8.2%
Hourly (n=47)55.3%14.9%14.9%6.4%8.5%
The survey asked a variety of other questions as well, including plan rules, overhang, and formulas for allocating awards. Data can be broken down by size, industry, region, and ESOP vs. non-ESOP. Access to the complete data set is available from the NCEO for $150 to members and $300 to non-members. Contact Loren Rodgers at for details.

Bill Would Provide Tax Exclusion for Employer Stock Held for 10 Years

Congressman Dan Rohrabacher (R-CA) has introduced H.R. 6419, which would exclude employer stock received as part of a qualifying distribution from a defined contribution plan and then held for at least 10 years. Because holding stock in a closely held company for that long is usually impractical, this would apply primarily to public companies. The bill has four Republican cosponsors. The bill has been referred to the House Ways and Means Committee. Action during this Congress is very unlikely, and the bill would face opposition in the future from people concerned that holding a substantial amount of employer stock after distribution would be financially risky for many people.

IRS Publishes Sample 409(p) Language

The Internal Revenue Service has published sample plan language to prevent violation of the Section 409(p) S ESOP corporation anti-abuse rules that prevent disqualified persons from ending up with more than 49.9% of the total deemed-owned shares of the company. One common way to avoid severe tax penalties from a violation of 409(p) is to move stock held in the ESOP portion of the account into a segregated non-ESOP portion, where it would be subject to unrelated business income tax. To accomplish this, the model language states, in part, that:

"A nonallocation event occurs only if (i) the total number of shares of employer stock that, held in the ESOP account of those Participants who are or who would be disqualified persons after taking into account the Participant's synthetic equity and the nonallocation event, exceeds (ii) 49.9% of the total number of shares of employer stock outstanding after taking the nonallocation event into account (causing a nonallocation year to occur as described in Section xxx of the Plan). No transfer under this section shall be greater than the excess, if any, of (i) over (ii). Before the nonallocation event occurs, the Plan Administrator shall determine the extent to which a transfer is required to be made and shall take steps to ensure that all action necessary to implement the transfer are taken before the nonallocation event occurs."

The ESOP Association, in comments on the language, noted that it seemed to require that the Plan Administrator effect a transfer that would result in exactly 49.9% of the of total number of shares ending up in the hands of disqualified persons. This would be impractical most of the time. In any event, the IRS would be better off if more were transferred to the segregated accounts because it would be subject to taxation. The Association suggested that the language be changed so say that the transfer could be no less than the excess of (i) over (ii).

Other parts of the suggested plan language deal with the order of the transfers, taking shares first from those with the largest number of ESOP and deemed-owned shares. An IRS spokesman told BNA that the language was simply sample language that would automatically pass a compliance test; it did not preclude other approaches.

Author biography and other columns in this series

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