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The Employee Ownership Update

Corey Rosen

December 1, 2009

(Corey Rosen)

New Charles Schwab Study Looks at Trends in Equity Compensation in Large Companies

A new study of 200 large companies by Koski Research for Charles Schwab shows that companies retain a strong commitment to equity compensation at all levels. Stock options remain the most popular form of reward, with 71% of the companies offering this benefit. Sixty-five percent offer employee stock purchase plans (ESPPs), 64% restricted stock, and 51% performance shares. One-quarter of the plans offer stock options or performance shares to non-management employees; 17% offer restricted stock. The study did not indicate what percentage of these employees were eligible, however, nor did it indicate how many companies offer more than one plan to non-management employees.

Companies report that employees below the executive level have only a limited understanding of the plan, perhaps because most of the information is passively communicated in brochures or on Web sites. Only 37% of the companies have live meetings on the plans, and 25% have one-on-one meetings with plan providers. The survey did not report what percentage of employees actually are invited to either of these kinds of meetings, however.

The market downturn has had no net impact on the prevalence of performance shares, but there was a net drop of 10% of companies using options and a 12% drop in those using restricted stock. Fifty-six percent of companies say participation in ESPPs has stayed the same (39%) or increased (17%), while there has been a decrease in 44% of the plans. Thirty percent of the companies say they are going to try to increase ESPP participation, while 15% plan to make less effort to do so.

The study, "Taking Stock: Examining the Role of Corporate Stock Plan Benefits in the Workplace," is available at this link.

ESOP Account Segregation, Rebalancing Update

Some months ago, there was optimism that the IRS would issue some kind of pronouncement on what approach it would take toward ESOP account segregation or rebalancing. Account segregation is where an ESOP company buys the shares of former employees and reinvests that money in other investments until distribution occurs some years later. Segregation is used to prevent former employees from benefiting from increases in share prices and to protect them from losses, arguably a very prudent retirement policy. Segregation can also help free shares for new employees and may be useful in managing repurchase obligation for some companies. Rebalancing occurs while participants are still employees. Each plan year, cash in the ESOP is used to buy shares in the ESOP in such a way that everyone ends up with the same proportion of cash and stock. Rebalancing is appealing to many mature ESOPs as a way to get shares to new employees.

The IRS had not been issuing letters of determination for plans with segregation provisions, although there was no official policy to this effect. But in the last several weeks, there have been reports that its concerns have been mollified. One concern was that employees would be impaired in their ability to demand a distribution in the form of company stock. While they could make that demand, if the plan used the cash to buy shares from the company, the basis for those shares could be much higher than it would have been if the account had stayed in company stock. Companies can solve this problem by reacquiring shares from accounts in the plan that have a basis as close as possible to the participant's basis at the time of segregation.

The IRS approach on rebalancing is also ambiguous. Rebalancing is not allowed to solve anti-abuse problems in S ESOPs, but many companies do have this feature in their plans for other purposes. Some IRS officials have informally said they may want to evaluate if rebalancing is consistent with ERISA, but there have been no indications that plans with these provisions have faced any specific problems.

Beyster, Kelso, and Smiley Fellowship Applications Sought

Rutgers University's School of Management and Labor Relations will offer 11 Beyster, Kelso, Rutgers, and Smiley fellowships for the 2010-2011 academic year to outstanding PhD candidates or post-doctoral scholars studying broadening the ownership of capital assets among members of a democratic society, such as employee ownership, profit sharing, and broad-based stock options in the corporation. Fellows can also work on issues related to how consumers and other individuals can acquire capital ownership of other enterprises. Stipends are $5,000, $12,500, and $25,000.

The fellowship recipients may be supported at their home institution or may be in residence at Rutgers University, with the period and length of residency varying between July 1, 2010, and June 30, 2011. The fellowships can be used for research, travel, or living expenses. The Beyster Fellowships are supported by the Foundation for Enterprise Development and the related fellowships are supported by the Employee Ownership Foundation.

For information write to beysterfellowships@smlr.rutgers.edu or see these links (PDF format): Beyster/Rutgers/Smiley fellowships and Kelso fellowships.

NCEO Board Nominations Now Open

The NCEO will hold its annual election for board members in January. We accept only self-nominations. Board members serve a three-year term at their own expense. The board meets in person during the afternoon and evening preceding the annual conference and the morning of the conference. In addition, board members serve on committees that help create projects, develop material for books and meetings, promote membership, and work with staff on finding funding for research projects. We seek members who will take an active role in NCEO affairs.

Nominees must be members in good standing. Send a 100-word statement to Corey Rosen at crosen@nceo.org that we can use in the election ballot no later than December 15.

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