The Employee Ownership Update
February 15, 2011
Fifty-Four Percent of 100 Best Places to Work Have Broad-Based Employee Ownership PlansOf the 72 employers on the 2011 Fortune magazine 100 Best Companies to Work For list that are for-profit, U.S.-based, and not legal or accounting partnerships, 39 (54%) have some form of broad-based employee ownership. That percentage has stayed remarkably consistent year after year. Thirteen of the 39 have only an employee stock purchase plan (ESPP), eight have an ESPP and either broad-based options or restricted stock (we define broad-based as available to most or all employees), six have broad-based options or restricted stock but not an ESPP, one provides phantom stock to most employees, four have ESOPs (two of these also have stock purchase arrangements), four have nonqualified stock or partnership purchase arrangements, and one has a trust for employee ownership. Four are majority employee-owned.
The complete list will appear in the NCEO newsletter to be mailed in April.
Drafting Equity Compensation PlansIn the last few months, we have been asked to take a look at some draft equity compensation plans in closely held companies. Each was drawn up by an attorney with limited experience doing this. Each had major technical issues that could cause problems down the line. The NCEO does have model equity plan and grant agreements you can use to cross-check the language
(see our list of equity compensation books).
As critical as the legal issues are, there are also common plan design problems. One of the most common is to grant equity in one form or another with a long vesting period (five years or even more unless there is a company sale) and no route to liquidity other than a sale of the company. If you are building your company with plans to sell in the next few years, this can be fine, but if a sale may be years off (or you want to stay private), these provisions will mean the employee will see the grants as almost worthless. Lots of recent research has shown that people tend to value possible benefits that are uncertain and far off at far greater discounts than what a "rational" economic model would tell you.
Say you share 15% of the equity with your employees. Your accountant tells you it is worth $200,000, even with the restrictions. But the employee will probably see a far-off, uncertain award like this to be worth maybe $25,000 to $100,000, depending in part on how much they trust you and in part how risk-averse they are. You have given up $200,000 to provide an incentive perceived to be worth far less. To be sure, providing faster vesting and liquidity can be costly, but in setting up a plan, you need to balance that cost with the fact that making the equity easier to cash in makes the incentive effect per dollar much greater.
Repurchase Obligation and Accounting: No Change in OffingSpeaking at a recent NCEO Webinar, Rebecca Miller of McGladrey & Pullen said that the Financial Accounting Standards Board has shelved its project on whether the ESOP repurchase obligation should show up as a liability on the balance sheet. The proposal caused a considerable stir in the ESOP community a few years ago. Miller, widely considered the leading expert on accounting for ESOPs, said that the FASB had shelved the project as part of its ongoing effort to meld U.S. and international accounting. Given that no other country has ESOPs, having a separate standard for ESOPs could be challenging. So don't expect any new requirements on this issue any time soon, if ever.
Discounted Registrations for Certified Equity Professional Institute Exam Available to NCEO MembersThe Certified Equity Professional Institute (CEPI) at Santa Clara University provides the gold-standard certification for equity plan administrators. Given the risks that errors in plan administration entail, it is essential that companies hire certified professionals to do the job. The CEPI curriculum is challenging and in-depth. Most of the materials used in the course come from the NCEO, which also offers test preparation courses. The CEP curriculum is updated frequently to reflect hot topics, including performance-based awards, proxy disclosures, modification accounting, repricing/exchanges, and IFRS 2. Details on the program are at this link.
The NCEO is on the CEPI Advisory Board. The CEPI is extending a discount to NCEO members. This opportunity will save employees of stock-issuing companies $200 on new exam registration fees (normally $1,295 for U.S. registrations, $1,495 for non-U.S.) for the June 4 exam. (The discount is not available for re-test or deferral registrations. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify.) To take advantage of this offer, please contact the CEPI at (408) 554-2187. Now is the time to act; registration closes April 22, 2011. If you are not an NCEO member, you can join for just $90.
Applications for Principal 10 Best Companies for Employee Financial Security Now Being SoughtPrincipal Financial has long sponsored an annual competition to name the 10 best small and mid-sized companies for employee financial security. Companies must have fewer than 1,000 employees to apply. The initial application process is fairly simple; finalists are asked to provide additional detail and be interviewed about what the company does. Last year, ESOP companies RLI and Clif Bar were winners.
I have been one of the judges for the competition for several years (the applications are anonymous, so I only occasionally know what the company is based on descriptive material). The most important element is health insurance, because over an employee's lifetime, that is by far the biggest financial issue. The next most important issue is retirement plans. Weight is also given to wellness programs, other forms of employee insurance, and innovative structures. Some allowance is made for industry issues.
Even if your company does not win, the feedback from the application process provides valuable benchmarking. To apply, go to this link on Principal's site.