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The Employee Ownership Update

Corey Rosen

August 31, 2010

(Corey Rosen)

President's Economic Recovery Advisory Board Report Lists Changes in ESOPs

The President's Economic Recovery Advisory Board is a commission of notable nongovernmental experts convened to consider ways to spur economic recovery. Paul Volcker chairs the board. One of its mandates is to look at ideas on tax simplification, greater tax compliance, and corporate tax reform. The board's August 2010 "Report on Tax Reform Options" consolidates ideas gathered from a variety of people (a copy of the report in PDF format is at this link). It does not make specific recommendations, but lists the pros and cons of each idea. It does not represent Administration policy, and the ideas it covers include a large range of possible changes, many of which would be "sacred cows." Along with a much more detailed discussion of a variety of options, the report very briefly lists "smaller tax expenditures that experts have mentioned as possible base-broadeners in a business tax reform."

One of these is ESOPs. The report's entire language on ESOPs follows (see p. 79 of the report):
ESOP plans are employer-sponsored retirement plans that typically invest entirely in stock of the employer. Special rules allow employers to deduct dividends paid to stock in ESOPs and allow employees to defer paying capital gains taxes on certain employer-stock transactions. Some argue that the special treatment given to ESOPs, which is even more favorable than other employer-sponsored retirement accounts, results in a lack of diversification in employees' retirement savings that can and, historically has, sometimes resulted in outsized losses to retirement wealth. Eliminating these special provisions and treating ESOP plans like other employer-sponsored retirement plans would raise revenues and harmonize tax incentives with other retirement plans.
It is not entirely clear what these "special provisions" are, but the language suggests it is the Section 1042 tax deferral for sellers to an ESOP in a C corporation (even though the language says "employees," I presume they mean sellers to an ESOP because otherwise the text is nonsensical) and dividend deductibility.

While any discussion of reductions in ESOP benefits tells us that at least some influential voices think ESOPs are too favored by the tax code, it is well to keep in mind that commissions like these almost never result in any policy changes (just as a similar one under President Bush on retirement plans did not), that the report discusses hundreds of possible changes, and that it is not endorsing any specific change.

NASPP/Deloitte 2010 Stock Plan Survey

The 2010 National Association of Stock Plan Professionals/Deloitte Consulting "Trends and Analysis from the 2010 Domestic Stock Plan Design Survey" shows some decline in broad-based stock plans but demonstrates that these plans are still alive and well, with at least 25% of non-exempt employees eligible for some kind of award. The survey drew responses from 597 companies, most of which are members of the National Association for Stock Plan Professionals (NASPP). The companies sampled tend to be very large, and almost all are both public and based in the U.S. Two-thirds of the respondents have 1,500 or more employees; just 9% have under 250. Twenty-one percent of the respondents are in some kind of high-technology business.

The survey found that 74% of the companies had overhang rates of 15% or less over the last three years, and 45% had overhang rates of 10% or less. Sixty-nine percent of respondents had run rates of 2.5% or less over the same period.

The survey asked respondents what kinds of plans they offered, who was eligible for various kinds of awards and, of these, how many actually received awards. The tables below extrapolate from the these three numbers to indicate what percentage of the total sample of companies make non-exempt employees eligible for awards and what percentage of those eligible in this category actually currently receive them (note that this is for the whole sample, not just the percentage in companies offering that kind of award). It is not possible from the tables to know in how many cases employees may be eligible for multiple kinds of awards. So while the total percentage of employees receiving any kind of award is larger than the percentage receiving any specific award, that percentage is also less than the total percentages for each kind of award added together.

Eligibility and Receipt of Stock Plan Awards, 2010, Non-Exempt Employees
Type of Award% of Companies Offering% Non-Exempt Eligible, All Companies*% Non-Exempt Receiving, All Companies**
Incentive Stock Options92%12.0%7.8%
Non-Qualified Options92%23.0%18.6%
Stock Appreciation Rights***15%2.6%1.3%
Restricted Stock58%7.0%4.9%
Restricted Stock Units73%11.7%9.9%
*This number is derived by multiplying the percentage of companies offering the plan by the percentage of non-exempt employees eligible for that kind of award.
**This number is derived by multiplying the percentage of companies offering the plan by the percentage of non-exempt employees actually receiving that kind of award.
***The stock appreciation rights category in the survey has three different groups depending on how the award is settled; this number blends the three into an approximate total.

Very conservatively, it appears that at least 25% of the companies make non-exempt employees eligible for some kind of award, and 20% of the companies actually provide grants of some kind of equity award to non-exempt employees. The real number is probably higher. While this survey sample is biased toward companies that already have some kind of stock plan, and probably somewhat biased toward companies with broad-based plans (companies with grants just for one or a very few employees would see less need to join a stock plan organization such as NASPP and thus would be unlikely to participate in this survey), the results do suggest that broad-based equity awards remain an important part of the compensation practices of public companies.

Massive International Survey Says Employees Would Work Harder with Profit Sharing or Ownership

A Kelley Services survey of 134,000 employees worldwide found that 61% of U.S. workers, 65% of Asia-Pacific workers, and 56% of European workers say that profit sharing or ownership would motivate them to perform at a higher level (the survey did not ask about these two separately). Across all regions, about 40% of employees are on some form of performance-related pay, with baby-boomer employees somewhat less likely to be on performance pay than younger workers.

Generational differences between employees were trivial, with just a 6% gap between the highest and lowest responding groups, yet another finding that the much ballyhooed differences between "GenX," "GenY," and so on are more talked about than actual.

"Profit sharing and company ownership arrangements create a powerful bond between workers and employers, and can motivate people to be more productive and creative," said Kelly Services Executive Vice President and Chief Operating Officer George Corona. "As a global talent shortage looms, employers may want to consider how they can improve the productivity of their work force by offering employment packages that align individual performance to corporate goals."

Author biography and other columns in this series

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