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The Employee Ownership Update

Corey Rosen

January 4, 2010

(Corey Rosen)

New NCEO Data on ESOP Trustee Practices

A new NCEO survey on ESOP governance practices shows that 13% of the responding companies have an independent institutional trustee, while another 4% have an independent individual trustee. That is down from 21% in 2005, although within the margin of sampling error. In addition, 11% of the companies have trustee committees with at least one outside independent member on them (we did not ask this question in 2005). The median compensation for independent trustees was $22,800. The board selected the trustee 71% of the time, senior management 18%, and an ESOP committee 11%.

The results are part of the new NCEO survey on corporate governance in ESOP companies (mentioned in the December 15 Employee Ownership Update), which looks at boards, trustee selection and practices, voting rights, and other issues. A summary of the results is available at no cost to NCEO members (companies who join can request the survey at no charge). In addition, we can do customized analysis of the data based on company demographic characteristics for $200. Contact Loren Rodgers at lrodgers@nceo.org for the free summary for members or for details on obtaining a customized analysis.

Senator Sanders Introduces Legislation to Promote Employee Ownership

Senator Bernard Sanders (I-VT) has introduced two bills to encourage employee ownership. The first, S. 2909, provides funding for states to set up employee ownership programs. Vermont and Ohio both have very successful programs and, in the 1980s, New York, Oregon, and Michigan also had very active programs. Massachusetts has had a much smaller program. NCEO research on the programs in the late 1980s showed that they increased the incidence of employee ownership plans in the states by about 20% to 33% above what would have otherwise been the case. I have long believed that these kinds of programs are the most cost-effective way to move employee ownership forward given the existing tax benefits the plans already have. The bill so is currently being cosponsored by Senators Patrick Leahy (D-Vt.), Robert Menendez (D-N.J.), and Sherrod Brown (D-Ohio).

The second bill, S. 2914, is sponsored by the same four senators. It would create a federal loan guarantee program to save jobs in specified circumstances when the result of the financing would be a company owned 50% or more by the employees.

The texts of the bills were not yet available when we went to press. The legislation marks the fourth and fifth bills introduced this year to encourage employee ownership. Others include the ESOP Improvements Act (S. 1612), a concurrent resolution to encourage employee ownership (H. Con, Res. 204), and the S Corporation ESOP Promotion and Expansion Act of 2009 (H.R. 3586).

Performance Shares?

There has been a lot of buzz lately about replacing traditional stock awards with performance shares. "Performance shares" is a term of art, not a legal term. It is simply a plan that grants shares outright to an employee upon the achievement of a specified target. That can be anything—the increase in share prices (indexed or absolute), revenue, profits, or whatever other critical number or numbers are chosen. The shares can be granted with or without further restrictions. For instance, the shares might be awarded upon the achievement of a goal, but then subject to vesting before they are actually delivered. The awards are taxed as income when the restrictions lapse, or at grant if there are none. If there are further restrictions at grant, the employee could make a Section 83(b) election to pay ordinary income tax currently, but then only pay capital gains taxes if and when the shares are ultimately sold (the initial tax is not refundable if the awards never vest, however).

The argument for performance shares is that they are less dilutive than other kinds of awards and that they only get awarded if the company or individual performs well. The trick, of course, is picking the right targets and time periods for achieving them. Some companies have granted these awards only to revise the targets when things get tougher, a practice that makes them look more like straight compensation. Others have set targets that are too easy to reach. Targets that are too aggressive, however, can be demotivating. More important, perhaps, is that it is easy to pick the wrong targets. Stock price growth, for instance, seems like a good goal, but not if it encourages an executive to forego long-term (but costly) investments to make short-term numbers look better. No equity incentive is perfect, however, and performance shares have a lot to recommend them if well-crafted.

Apply Now for Winning Workplaces Awards

Once again, it is time to think about applying for the annual Winning Workplaces awards. If your company has 750 or fewer full-time equivalent employees, you are eligible. The award is being cosponsored by Inc. magazine. Of the past 45 winners, 15 have been NCEO members, and of the past 105 finalists (35 per year) about a third has been NCEO members as well. Ten of the 15 winners last year now share ownership with at least some of their employees. I don't have any specific data, but I am sure that a very high percentage of NCEO members who apply at least make it to the finalist round. The process once the evaluation actually starts also provides good feedback for your company even if you do not win.

There is a $100 application fee, but the actual application process is not too complicated, and the initial application is very short. Winners will be announced in the June issue of Inc., so it is good publicity for your company. The deadline is January 22. You can learn more at this link. To apply, go to this link.

Please remember on the nominating form to indicate we referred you. That will make it easier for us to track how successful our members are.

NCEO Executive Director Search Closed

In April 2011, I will step down as director, although I will continue as a staff member, hopefully for many years to come. The search process for a new director has now closed. I think we have found the perfect candidate. We will announce the new director at our annual conference in April 2010.

Author biography and other columns in this series

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