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The Employee Ownership Update

Corey Rosen

July 29, 2010

(Corey Rosen)

People Just Don't Stay with an Employer as Long as They Used To and Other Myths

One of the most persistent myths about the work force is that employees don't stay with their employers the way that earlier generations did. It turns out this just isn't true. The Employee Benefit Research Institute (EBRI) has tracked decades of data on this, and no matter how the numbers are diced and sliced, changes in tenure patterns are minimal over time.

So where did this idea come from and why is it so persistent? I asked Dallas Salisbury, the head of EBRI, for his thoughts. His guess is that at the corporate officer level in public companies, things really have changed. CEOs now do have a short tenure, often under five years. New CEOs increasingly come from outside the company and bring in their own new team (a cause, I think, of much of the market turmoil and excessive executive compensation in recent years). Salisbury says that when these people now gather in the executive dining room, they see all these new faces and conclude that the rest of the world must be like them too.

The turnover myth is just one of a number of persistent legends that are at best interesting oddities or, at worst, causes for misguided policies. The so-called "war for talent" at the executive level, for instance, assumes there are always too few talented people for top-level jobs and that their numbers keep shrinking, even in a recession. It's a largely self-serving myth propagated by compensation consultants and high-level executives that Malcolm Gladwell gleefully dissected as far back at 2002. His article, reprinted at this link, is well worth reading.

Similarly, perceptions about generational differences in employee expectations, while having some grounding in reality, are largely fictional. See the article at this link for a brief synopsis of why. It turns out that we all want and have wanted pretty much the same things out of work for a very long time. Differences get even smaller when industry, education, and income are held constant. And, as I have often written, the "80-20" rule (that 80% of the performance in a company comes from 20% of the people) is pure nonsense backed by zero actual data.

The real danger of these myths is that, as managers, we start acting on the assumption that they are true. If we view people through these lenses, artificial though they are, people may start behaving consistently with our expectations, even if we would prefer they didn't. So before accepting the conventional wisdom we all know is true, take a few minutes to check out the data. Google makes it easy. Just put in the issue (such as generational differences among employees, and add "myth" or, at least, "research").

Examiner Finds Tribune Solvency Opinion in ESOP Transaction May Involve Fraud

Kenneth Klee, a special examiner for the Delaware bankruptcy court dealing with the Tribune Company's bankruptcy, has concluded that "it is highly likely that Tribune, and reasonably likely that the Guarantor Subsidiaries, were rendered insolvent and without adequate capital as a result of the closing of the Step Two Transactions. Based on the record adduced, the procurement of the solvency opinion was marred by dishonesty and lack of candor about the role played by Morgan Stanley in connection with VRC's [Valuation Research Corporation] solvency opinion and on the question of Tribune's solvency generally. Second, the Examiner found evidence indicating that Tribune's senior financial management failed to apprise the Tribune Board and Special Committee of relevant information underlying management's October 2007 projections on which VRC relied in giving its Step Two solvency opinion."

The Tribune Company was bought by Sam Zell and an ESOP in 2007 in a complex, two-step transaction. In step one, Zell put in equity and the ESOP bought newly issued shares. In step two, a self-tender was undertaken to buy out all the shares, including Zell's, with additional debt. The result was a 100% ESOP with Zell having warrants worth 40% of the company. In question here is step two. The board hired Valuation Research to give a solvency opinion. The examiner found that the opinion lacked credibility, that projections about solvency from management were unreasonably optimistic and poorly vetted, and that Morgan Stanley's imprimatur on the transaction was overstated. In addition, the examiner said in "effect, VRC was required to add to the value derived from its analysis the value conferred on the Tribune Entities from the S-Corporation/ESOP structure as a result of the Merger, even though inclusion of this value in the determination of 'fair market value' and 'fair saleable value' was improper."

The report said there was not credible evidence that other third parties, including Zell or, presumably, other players in the ESOP process, would be likely to have committed intentional fraud.

The issues presented here are as complex as the transaction, with multiple players and the added complexities of bankruptcy. At stake is who has claims to what in bankruptcy proceedings, but no doubt the report will also play into any litigation concerning the ESOP itself at Tribune.

The 1,000-page report is full of redacted material subject to confidentiality agreements. A detailed summary of the report can be found at this link (PDF format).

Will the New Executive Compensation Rules Matter?

The financial reform legislation requires non-binding shareholder votes on executive pay; more stringent rules for the independence of compensation consultants; the expansion of existing stock exchange rules prohibiting brokers from voting uninstructed shares held in street names on some issues to include say-on-pay votes; a requirement that companies adopt and disclose clawback policies for compensation resulting from misleading financial statements; and a requirement that companies report on the ratio of CEO pay to median pay.

The news is clearly good for the consultants who will help companies navigate through all this, but will it have much impact on executive pay or just change the window dressing? That's hard to predict, but experience does not give cause for optimism (or pessimism if you are a CEO). Prior changes, such as the revised accounting rules, SEC compensation disclosure rules, and Section 162(m), which limited deductions for executive compensation that were not incentive-based, all had the effect of changing some of the structure of how pay was delivered, but were more form over substance. Section 162(m) in particular deserves a spot in the museum of unintended consequences for actually encouraging mega-grants of equity compensation instead of reducing executive pay as it was intended to. Pay for top executives continued to grow much faster than pay for anyone else, despite expectations that these changes might actually slow the growth. In fact, disclosure may have accelerated growth as CEOs and other officers found out more about what their peers made.

How pay decisions are presented to shareholders, and the specific composition of pay, could well change, especially making more of the pay contingent on longer-term performance. But experience suggests that boards have, in effect, set a target for how much executives should make, then fiddled with ways to get there. Unless there is a sea change in how both the role and significance of the CEO and other top executives are viewed, I expect more noise than action.

Have a "Don't Do That Story" for Equity Compensation?

Despite, or perhaps because of, the extensive regulations surrounding equity compensation, wherever industry professionals gather, it only takes lifting your ear to hear exciting and scary stories of ill-planned transactions, poorly designed awards, unexpected tax consequences, frustrating accounting situations, or any number of what may be called equity compensation horror stories. It's the nature of the industry.

So we have decided to take the beast by the horns and use some of the scariest stories as teaching opportunities. We recently published Don't Do That for ESOP companies. Don't Do That was so much fun, we've received requests to write a companion book about broad-based equity compensation surprises.

The NCEO is soliciting stories for publication in the first quarter of 2011. If you want to submit something that does not identify you or the company, we've set up a submission site at this link to protect the anonymity of our sources. We'll be accepting submissions and title suggestions through September 15 and then have a voting period September 16-30.

We are also asking professionals from across the board, including equity administrators, accountants, attorneys, and human resources and tax professionals, to contribute their most compelling stories and story ideas. These stories can hide the identity of the company, but the author can get a byline. If you know someone who has a good (bad) equity compensation story or if you belong to an online professional discussion group whose members may have appropriate stories, please feel free to re-post this announcement with the link to the submission site so they can participate, too.

Our goal is to gather as many stories as possible across the spectrum of equity compensation issues (e.g., administration, plan design, tax, accounting, law, communication, or international/mobility) and then ask everyone to come back and vote for their favorites. The most popular and well-written stories will be included in our upcoming book, scheduled to be published in early 2011. Please follow the link above to our submission guidelines, which explain what we're looking for and what you should expect. Good luck and we look forward to reading your stories!

If you're not submitting stories or title suggestions, watch for an alert when the voting period opens.

Author biography and other columns in this series

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