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The Employee Ownership Update

Corey Rosen

October 15, 2008

(Corey Rosen)

Twenty-Nine Percent of S&P 500 Companies Have Broad-Based Ownership Plan

NCEO research for Innovest and the Herron Foundation has found that at least 29% of S&P 500 companies have some kind of broad-based employee ownership plan. To qualify for the list, a company had to have an ESOP, a 401(k) plan or other defined contribution plan with investments in company stock, or a broad-based stock option plan. Companies that only had employee stock purchase plans (ESPPs) were not included, but many of the companies with other broad-based plans also had ESPPs. One hundred and thirty-three of the companies had a 401(k) plan only, another 71 had a 401(k) plan and an ESOP, 12 had a 401(k) plan and a stock purchase plan, 17 had an ESOP only, and 22 had broad-based options or similar plans. The broad-based option group, however, underestimates how many companies had these plans. General surveys suggest about 12% of public companies have broad-based equity award plans that make most employees eligible. However, there is no way to obtain a specific list of these companies. We only included those, therefore, where we had confirmation of their plan from a consultant, their Web site, or information from the Best 100 Companies to Work For list.

The percentage employees own in these companies is almost always small, usually under 5% and rarely over 10%. The total dollar amount, however, sums to over $100 billion.

Spate of Lawsuits Follows Financial Sector Firm Woes

A new round of "stock drop" lawsuits has been filed in the wake of the implosion of leading financial institutions on Wall Street and elsewhere. Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Wachovia, Fifth Third Bancorp, and AIG are among those where suits have been filed, with other being filed at regional banks. The suits focus primarily on the plans having company stock as an investment option. They charge that plan fiduciaries (almost always insiders) should have known about the riskiness of the investment and should have removed the option. That tack may prove difficult to sustain, based on prior cases, but arguments that fiduciaries continued to promote company stock as a good investment will get more traction.

Five of the 15 Winners of Wall Street Journal/Winning Workplace Top Small Workplaces Have ESOPs

This year's winners include:

All four companies practice open-book management and have structured, active employee involvement systems that go well beyond the norm. All four are also NCEO members.

Another winner is Paducah Bank and Trust in Paducah, Kentucky, a non-majority ESOP company that has a strong record of community involvement and, remarkably in the era of bank implosions, had record profits in 2007 and is having a very good year in 2008.

NCEO director Corey Rosen was one of this year's judges, but he recused himself from judging NCEO member company applicants.

We strongly encourage NCEO members to apply for the award (the track record of those who have applied shows a high rate of success). Nominations for next year's awards are now open by going to www.winningworkplaces.org.

Correction on Obama Letter on ESOPs

In the last update, we said that Senator Obama expressed qualified support for ESOPs in a recent letter to the ESOP Association. Actually, it was a letter written in 2005 to an Association member that was reprinted in a recent issue of the Association's newsletter. The error was ours.

Bailout Bill Patches AMT, Limits Executive Pay in Affected Companies

The financial bailout bill contained an Alternative Minimum Tax "patch" that will keep the tax from applying to millions more taxpayers. Because the spread on incentive stock options is subject to the AMT, this means that many incentive option holders will be spared potential additional taxation.

The bill also places some modest, and probably difficult to enforce, limitations on executive pay for companies rescued by the bailout, including a reduction to $500,000 for tax a deductions under Section 162(m) of the Code for companies getting the most direct assistance and limits on golden parachutes for executives of firms participating in the program in any way. Past efforts to limit executive pay have failed as attorneys and boards have found ways around them. Shareholder pressure and economic reality may be more effective constraints.

New From the NCEO: An Ownership Tale

At the end of this year, the NCEO will publish my new short book, An Ownership Tale. I wrote it because of all the company leaders who asked me for a tool to help employees wrestle with the real-life issues of employee ownership without cheerleading, platitudes, or lofty abstractions.

An Ownership Tale is a detailed look inside BTA Associates as it deals with the successes and setbacks in the transition from an ineffective ESOP to an engaged ownership culture. BTA Associates does not exist, but everything that happens in the book is based on stories I have heard over and over in my 30 years of working in this field. The barriers, stumbles, conversations, first steps, and final resolutions are all based on the real experiences of companies and their employee owners.

The 70-page book includes a set of suggested group exercises to help create or improve an ownership culture.

Author biography and other columns in this series

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