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The Employee Ownership Update

Loren Rodgers

September 2, 2014

(Loren Rodgers)

Press Coverage of Employee Ownership

The current issue of Seattle Business includes an article titled Fully Invested, which looks at employee ownership in Red Dot Corporation and several other Washington-based employee-owned companies. The article, by Greg Lamm, provides an overview of ESOPs in Washington and the United States. We've included the opening graphic below.

Fully Invested

New Paper Shows Option Grants Tend to Focus on Number, Not Value, of Award

A new study of option granting practices for CEOs in public companies finds that companies tend to grant options based more on a fixed number of options than on the value of these awards. The practice was especially notable prior to 2006, after which accounting changes required companies to show the present value of options on their income statements. The paper, Growth Through Rigidity: An Explanation for the Rise in CEO Pay, by Kelly Shue of the Booth School of Business and Richard Townsend of the Tuck School of Business, was published in April 2014 as a working paper by the two schools.

The authors point out that granting options based on a fixed number of underlying shares rather than their value tends to exaggerate returns upward in good years and downward in bad years. While the study focused on CEO awards, in the NCEO's experience, the same thing happens at all levels. The authors did find less rigidity in the practice after accounting rules changed, but option grants are still more rigid than would be expected in a more rational economic value model. The authors find that actual share awards, such as restricted stock, are sensitive to value, suggesting that even seemingly sophisticated compensation committees and executives distrust or do not understand option valuation models.

This same irrationality has shown up in companies replacing options with restricted stock because the restricted shares are less dilutive (each option award counts as one share for dilution purposes). Because corporate control is not an issue with equity awards, dilution in terms of nominal shares outstanding is not a relevant issue. The real issue is the economic impact of the awards on the company's finances. These practices underline the notion that the market for equity compensation is often not rational. Companies looking at making grants of any kind of equity need to compare apples-to-apples present values of awards to find the award value that make sense.

40th Anniversary of ERISA

On September 2, 1974, President Gerald Ford signed the Employee Retirement Income Security Act, the first federal law that provided specific federal tax treatment for employee stock ownership plans (ESOPs).

Cooperative Home Care Associates

The largest worker cooperative in the United States is Cooperative Home Care Associates (CHCA) of New York, employing 2,300 home health care workers. In an industry with low wages and average employee turnover well over 50%, CHCA pays almost twice the market rate and has annual employee turnover of 15%. Yes! Magazine published an article last month titled How America's Largest Worker Owned Co-Op Lifts People Out of Poverty that summarizes CHCA's history and its current state, putting it in the context of New York City's financial support for worker cooperatives.

Salisbury University Course on Shared Entrepreneurship

On September 26, Salisbury University (Maryland) will offer a half-day course on shared entrepreneurship, cultures of innovation, and hands-on examples from the recently published book Shared Entrepreneurship.

Author biography and other columns in this series

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