The Employee Ownership Update
June 1, 2012
Employee Stock in Facebook and the Taxation of RSUsThe ups and (mostly) downs of Facebook's stock following its IPO have generated countless articles and commentaries, but another angle of the story is the taxation of the company's broad-based equity compensation plan. Facebook helped pioneer the use of restricted stock units (RSUs) in its 2005 stock plan. RSUs give employees the right to receive shares, but they do not receive the actual shares until certain conditions are met, an IPO being one of the triggers. By not having shares in the hands of employees, Facebook stayed under the 500-shareholder threshold to avoid becoming a de facto public company.
Following the IPO and a waiting period, employees will receive those shares, the full value of which will be subject to Social Security and Medicare tax and, for many employees, ordinary income tax as well. The result? Facebook is setting aside $4 billion to cover 2012 taxes on employee equity compensation, which translates to roughly 45% of the value of those awards for many employees.
Employee Ownership, Private Equity, and Job CreationBoth private equity and ESOPs often use equity to change ownership patterns, often with the goal of creating more efficient companies. Recent research published by the National Bureau of Economic Research (NBER) suggests that the impact of private equity on job creation, however, is markedly different from ESOPs.
In "Private Equity and Employment" (NBER Working Paper No. 17399, September 2011), Steven J. Davis, John C. Haltiwanger, Ron S. Jarmin, Josh Lerner, Javier Miranda, all of whom are professors at various universities, find that "relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors." They also find that when private equity firms take over nonpublic companies, they produce significant job gains, but that is almost entirely due to additional acquisitions these firms make.
By contrast, research looking at ESOPs in both the 1980s and 1990s, first done by the NCEO and later by Joseph Blasi and Douglas Kruse of Rutgers, found that adoption of an ESOP increases employment by 2.5% per year relative to what would have been expected for these companies when industry effects are controlled for over the period. Because it was very rare at that time for ESOP companies to acquire other companies, virtually all this added growth was from newly created jobs.