The Employee Ownership Update
February 2, 2009
ESOP Companies Weathering Tough TimesBased on a quick survey of consultants providing services to approximately 1,000 ESOPs, ESOP companies seem to be weathering the economic downturn relatively well. We asked several large ESOP providers to tell us how their clients have done in the last year. Weighting the responses by their number of clients, the following data resulted:
The survey was by no means comprehensive and relied on the estimates of providers, not company-by-company analyses. Given the large number of companies involved, however, it is probably reasonably representative of what is going on. Some of the providers, however, commented that they expected 2009 to be a tougher year. The NCEO will release the second round of data from ESOP companies about the impact of the credit crisis in late February.
- Bankrupt or about to go bankrupt: 1.4%
- Laying off or planning to lay off 20% of more of workforce: 5.3%
- Breaking even: 17.1%
- Profitable, but no plans for hiring new people: 49.2%
- Profitable with plans for hiring new people: 26.9%
Data on how well similar non-ESOP companies are not available.
Google's Generous Option Exchange ProgramGoogle has joined the ranks of companies allowing employees to exchange their stock options. The 17,000 employees holding options granted at more than $400 have can now exchange their options for new awards that will be priced at the March 2 closing price (shares were at $306 when the announcement was made). Employees will have a year added to their vesting schedules for the awards. Google expects to take an accounting hit of about $360 million.
The program is generous relative to other option exchanges, which typically allow for less than a one-for-one exchange. Critics, such as RiskMetrics' Patrick McGurn, argue that Google's plan will set a dangerous precedent for other companies. Google's compensation and culture, however, are heavily focused on broad-based ownership, and the costs of not making the exchange could be very high in terms of employee morale and retention. Shareholders did not seem to take such a dim view of the exchange. The day after news of the program came out, Google's shares increased 6.5% on a day that the Dow declined 0.7%.
ESOPs and the Coming Wave of Business SalesBecause most ESOPs are used to provide for business transition in closely held companies, probably the most important issue for the future of ESOPs will be demographics. A 2001 Federal Reserve Survey of Consumer Finances reported that 50,000 businesses changed hands in 2001. That number grew to 350,000 in 2005 and is projected at 750,000 for 2009. According to the 2008 survey "America's Entrepreneurialist Generation: Exit Planning and the Baby-Boomer Age Wave," 53% of baby-boomer business owners intend to exit in the next nine years. Only one in seven plans to pass their business on to a family member. Details of the survey are available at this link.
NCEO Member Survey Preliminary ResultsThe NCEO's first survey of its ESOP membership is underway (a survey on equity compensation and one for service providers will follow). Results will change as more companies complete the survey, but some preliminary highlights are emerging:
Member companies with ESOPs may complete the survey at this link. Participating companies will receive an advance summary of the results, and some results will be used to create a searchable database available exclusively to NCEO members.
- Similar to our survey in October 2008, the majority of companies report no change in their access to credit (72% and 79% for long- and short-term credit, respectively).
- Compared with the October survey, far more companies (38%, up from 23%) expect to shrink, but are confident about their survival, and 2% are concerned about their viability.
- 46% of responding companies have ESOPs that are currently leveraged.
- Two-thirds have internal trustees and 16% have institutional trustees.
- The greatest number of companies (38%) reported contributions between 4% and 10% of eligible compensation; 7% reported no contribution in the most recent year.
Author biography and other columns in this series