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The Employee Ownership Update

Corey Rosen

April 1, 2009

(Corey Rosen)

Financial Accounting Standards Board Considers Whether ESOP Shares Are Liabilities

The Financial Accounting Standards Board (FASB) has reopened the question of whether shares held by an ESOP that are mandatorily redeemable upon the occurrence of an event certain to occur, such as death, termination, or retirement, should be accounted for as a liability rather than equity. Previously, in Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," FASB required companies to classify certain kinds of financial instruments this way, but it excluded ESOPs and other retirement plans subject to further review. That further review is now under way.

The issue for ESOPs is that the trustee has no put option when the shares are held by the trust, so, arguably, the shares should not be considered as mandatorily redeemable (this same argument has been made by some ESOP attorneys and appraisers with regard to not reducing liquidity discounts for ESOPs because the trust does not have a put option). Companies that translate stock value into cash before distribution presumably would not have to account for the shares as a liability. If ESOPs do turn out to be covered by this requirement, the added liabilities could make it more difficult to obtain financing.

It is not clear what FASB will do on this issue. Some board members have indicated that they favor an exemption for financial instruments that are redeemed at fair market value, for instance. It is also not clear whether FASB will issue specific rules or more general principles. Becky Miller of McGladrey & Pullen, widely viewed as the leading expert on ESOP accounting issues, has told us she does not believe principles-based accounting would present a problem for ESOPs on this issue.

Companies wanting to express views on this would best be advised to do so through their accountants. FASB is not receptive to arguments about what this might or might not do to the ability of ESOP companies to obtain credit, just as they were not about the purported effect of accounting for options on companies' willingness to grant them. Instead, the arguments need to be couched in terms of the legal and financial issues involved.

For more details on the project, go to this link.

French Executives Give Up Options, Give Them to Employees

Under intense pressure from the public, striking workers, and Sarkozy government, the two top executives at the French utility GDF Suez have given up their stock options and instead will use the money to provide options to 8,000 individual employees and 4.4 million free shares to its 200,000 employees worldwide.

Do Your Cash Incentive Plans Work?

The NCEO is revising our book on incentive compensation plans, and we would love to hear from you about what your experiences, good and bad, have been. Any details of what has made plans succeed or fail would be much appreciated. We can keep your company's name anonymous if you prefer.

One of the issues the book will address is whether any incentive plan can work. Critics argue that dangling carrots in front of employee owners may be counterproductive. Incentives can easily become entitlements, can encourage people to focus too intently on one aspect of performance or another, and may send a message to people that they have to be bribed to perform. Proponents argue that well-crafted plans provide short-term rewards for employees that help keep them motivated and focused.

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NCEO Partners in New Technology to Predict Effects of Executive Pay

OAKLAND, Calif., April 1: The National Center for Employee Ownership, working in conjunction with a major medical imaging company, will soon announce a breakthrough technology to help companies better measure how varying approaches to executive compensation affect executive performance.

"In the last few years, there has been enormous concern about poorly targeted executive pay," said NCEO Executive Director Corey Rosen. "Some have argued that pay systems have encouraged excessive risk, while others have contended that higher and higher levels of executive pay are not associated with executives performing better, working harder, or staying with the firm longer. Unfortunately, assessing these impacts is largely second-hand guesswork based very often on conflicting data. We really haven't been able to get into executives' heads about just how pay changes their thinking."

"Well, now we can," Rosen announced. "Our new system, MIRED (for Magnetic Imaging Results for Executive Decisions) is a harmless electronic device that attaches to the ear and looks just like a Bluetooth headset. It detects brain wave patterns in executives in response to various pay systems. Under this new system, for instance, we can see if a board decision to grant more options lights up areas of the brain associated with risk taking, such as making large bets of collateralized debt obligations. When a CEO makes predictions to analysts just before options are due to be exercised, the scanner can detect areas of the brain that indicate deceitfulness. When a CEO is granted restricted stock, we can see if areas of the brain associated with taking more time off to play golf light up."

"We can also decipher the true meaning of executive announcements to employees. When an executive who has just been granted a 30% raise tells employees they are the company's most important asset, we can look at the brain areas associated with telling a good joke. The imaging technique is still too new and expensive to be used for anything other than executive pay, although it will cost considerably less and make fewer errors than a compensation consultant," Rosen said. "But over time, the costs will of course come down a lot. In the future I can see these devices being given to all employees to assess whether they really are satisfied with work, whether they really do plan to diversify their ESOP accounts or exercise their options, whether they think their colleagues are idiots in staff meetings, how many times a day they fantasize about what they will say to their boss on their last day of work, and lots more. From there, it is a short step to software to reprogram their brains to more productive pursuits."

Rosen said MIRED should be launched as soon as a grant for its development under the aptly named Economic Stimulus Package is provided.

Author biography and other columns in this series

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