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The Employee Ownership Update

Loren Rodgers

March 14, 2014

(Loren Rodgers)

President's 2015 Budget Proposes Elimination of Dividend Deductibility for Public Companies

President Obama's proposed 2015 budget includes some provisions that would affect ESOP companies. Most notably, the General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals (the so-called "Green Book") says the "the proposal would repeal the deduction for dividends paid with respect to employer stock held by an ESOP that is sponsored by a publicly traded corporation." This is a change from the President's 2014 budget proposal, which called for eliminating the deduction for all C corporations with $5 million or more in revenue.

The discussion (see pages 197-98) covers the competing policy interests around ESOPs, noting the policy goals of, on the one hand, "encouraging employee ownership, which in turn has been viewed as having a productivity incentive effect," and reducing the risks of asset concentration on the other. The budget explanation argues that the best way to balance those competing policy goals is to eliminate the dividend deduction only for public companies, stating that "Ownership of stock of a publicly traded corporation through an ESOP seems unlikely to offer significant productivity incentives to employees because their aggregate ownership interests in the corporation are more likely to be small relative to the ownership interests of public shareholders."

The budget also includes provisions that would affect ESOP companies, such as limits on contributions to retirement plans in general and eliminating the exemption on taxation for carried interest and pass-through payroll tax. The President's budget is not expected to become law, but it will serve as a blueprint for the Democratic Party.

Australian Government Explores Reform of Employee Ownership

The economics and finance policy committee, composed of members of the governing Liberal/National coalition in the Australian Parliament, met in early March to call for reforms that would encourage more equity compensation and employee ownership in Australia. Tony Smith, a Liberal MP from Victoria, and Christian Porter, the former treasurer of Western Australia, called the meeting of the committee, which develops legislation before it is introduced publicly. Smith told the Australian Financial Review that "We know from world experience that where employees have a stake in the outcome, the businesses are more productive and successful."

Employee Ownership Australia and New Zealand issued a press release applauding the meeting and noting that "Australia lags behind the rest of the developed world in the area of employee share ownership." The EOA calls for a five-point reform of Australian laws, including a focus on employee ownership in both startup companies and in business transitions. The prior Australian government, under the Labor Party, instituted changes in 2009 which a March 3 article in the business publication BRW notes "were blamed for the almost overnight collapse of employee share schemes in Australia."

New Analysis Addresses How ESOPs Stack Up as Retirement Plans

The NCEO has completed a detailed comparison of how ESOPs fare as retirement plans compared to other defined contribution plans. The analysis includes both a detailed narrative and tabular comparison.

The analysis shows that ESOP participants typically fare better than participants in other defined contribution plans. Company contribution rates are 50% to 100% higher, ESOP companies are somewhat more likely to offer secondary retirement plans than other companies are to offer any plan, ESOP participants are less likely to be laid off, account balances have 2.2 times the retirement assets as employees in other retirement plans, and ESOPs are much more likely to provide meaningful benefits to younger and lower-income employees. In addition, rates of return in ESOP companies are higher than in 401(k) plans and less volatile. We encourage people to send this link to anyone who may be interested.

CEP Symposium: March 25 in Santa Clara

The Certified Equity Professional Institute at Santa Clara University will hold its 10th annual symposium from 8:00 AM to 5:00 PM (with a reception to follow) on March 25. The meeting, which draws some of the best-known speakers in the country on equity compensation, includes topics such as tax accounting, employee mobility, ESPPs, and ways to make sure your company gets the greatest possible benefit from its plans.

BBC Reports on Employee Ownership in Scotland

In a March 13 report, the BBC cited Ross Brown, who led a team of researchers from St Andrews, Edinburgh Napier, and Stirling universities in a project on employee ownership in Scotland. The team found 45 employee-owned businesses, employing about 2,500 people, in Scotland, and noted that employee-owned businesses were primarily small and medium enterprises. The study also found higher rates of growth in employment and sales.

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