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The Employee Ownership Update

Loren Rodgers

June 1, 2012

(Loren Rodgers)

Employee Stock in Facebook and the Taxation of RSUs

The 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 Creation

Both 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.

Does Your Company Have Ideas to Share?

The NCEO is looking for documents and tools companies are using to create and sustain effective communication with their employee-owners. If you have a presentation, poster, agenda, intranet screenshot, ESOP calculator, educational contest, mini-game, video, or anything else you think other companies might like to see, please contact Jessica Thomas at 510-208-1301 or jthomas@nceo.org. Your document may appear in the next edition of The ESOP Communications Sourcebook, which covers best practices for ESOP communication and useful resources from innovative ESOP companies. (You can remove or black out confidential information, or even your company name.)

Americans Under 35 Move Away from Stocks

About one in three Americans aged 18 to 34 said that they plan to transfer investments out of stock and into money market and savings accounts, saying that they expect to "sit on the sidelines" in the next six months. By contrast, only 11% of older Americans expect to do the same. These figures come from a survey conducted by Koski Research for Charles Schwab.

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