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The Employee Ownership Update

Corey Rosen

March 15, 2011

(Corey Rosen)

Top Executives Exercised About $25 to $30 Billion per Year in Equity Programs from 2001 to 2007

The top five executives of the 1,500 largest corporations in the U.S. averaged $25 to $30 billion per year in non-salary compensation between 2001 and 2007, according to a new report, Inclusive Capitalism for the American Workforce, by Richard B. Freeman of Harvard and Joseph R. Blasi and Douglas L. Kruse of Rutgers University. The report's estimates include actual profits from stock option exercises, not the values that are included on financial statements and annual reports, which are estimated long before the actual profits are known. The report's figures are based on Standard & Poor's ExecuComp data through the most recent year for which full data are available. During that same period, the share of national income going to labor either fell modestly or dropped fairly sharply, depending on whether one uses the Bureau of Labor Statistics or Bureau of Economic Analysis estimates of labor's share. The report is available at this link.

The authors argue that almost all of the equity awards involved are considered "performance-based" under Internal Revenue Code Section 162(m) and thus are exempt from the $1 million cap on compensation paid to certain executives that a public company can deduct from its income before taxes. This means that these deductions constitute a major public tax expenditure to support executive compensation. The report lays out a policy proposal that would maintain the deductions only for corporations that have broad-based equity and profit sharing programs that distribute at least as much to the bottom 80% of employees as those going to the top 5% of employees. Small businesses would be excluded. The entire policy discussion can be viewed at this link.

To put these data in perspective, the amounts going to the top five executives in these 1,500 companies (most of which is in equity) is about what is typically contributed to all ESOPs in a year and is about one-third of the total annual corporate contribution to all defined contribution plans.

Department of Labor Holds Hearing on ESOP Appraiser and Other Fiduciary Proposals

The U.S. Department of Labor held hearings on its proposed fiduciary regulations, which, among other things, would define ESOP appraisers as fiduciaries. Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) Phyllis Borzi said she saw no conflict between naming the ESOP appraiser as a fiduciary and having the ESOP trustee be a fiduciary as well. Borzi said the appraiser's job would be to find the right value, not to find the best value for the ESOP, as some commenters suggested a fiduciary role for appraisers would imply. (The ESOP fiduciary's task when buying shares from a non-ESOP owner, as defined by law, is not to pay more than fair market value.) Timothy Hauser of EBSA suggested the proposed regulations might be rewritten to provide that the appraiser's job was simply to find the correct fair market value.

Borzi also said that the DOL's experience was that having an appraisal done by a large established firm was no guarantee and that many of the department's actions were against such institutions. Borzi and other DOL officials said that under current law, the ESOP fiduciary does not have the capacity to fully assess valuations and that, as DOL's Alan Liebowitz said, the person doing the valuation is "essentially unreachable in any enforcement process." Having them meet professional standards would suffice, he indicated.

The proposal has met with considerable criticism from the ESOP community. The hearings did not provide any final answers as to what the DOL will do. Borzi said she expects the rule to be finalized by the end of the year. Meanwhile, some ESOP companies and consultants are contacting their congressional representatives about the issue, urging them to contact the department.

Great Game of Business Conference Coming Up May 4-6

The 19th Gathering of the Games will be held May 4-6 in St. Louis. I have been to all 19, and this year I have the honor of keynoting the conference. I'll be speaking on what makes a great workplace and why so many companies don't even try to become one.

The gathering is a great opportunity to learn about open-book management and employee involvement. It is low on theory and exhortation and high on hands-on, practical sessions from experienced open-book companies and experts. For details on the meeting, go to this link.

Foundation for Enterprise Development "Creating Wealth by Sharing Wealth" Nationwide University Essay Contest Winners Announced

More than 430 graduate and undergraduate students from across the U.S. submitted essays describing their strategies and practices for increasing employee motivation and participation in enterprise growth, creating innovative and productive firms, and establishing more fair and sustainable economies in the 21st century through broad-based employee ownership and profit sharing in the corporation.

The winning essays can be viewed at this link. The winning students will be at our annual conference. Companies that wish to get in touch with the students can find contact information on the FED Web site and can get resumes on request.

Author biography and other columns in this series

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