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The Employee Ownership Update

Loren Rodgers

February 2, 2015

(Loren Rodgers)

EBRI's Release of 2013 Data Shows Extent of Company Stock in 401(k) Plans

The Employee Benefit Research Institute (EBRI) released its annual report on 401(k) plans, 401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013. EBRI found that company stock constitutes, on average, 7.3% of plan assets. That percentage is unchanged from 2012, but has declined steadily for the five prior years from 11% in 2007. The 72,676 plans in EBRI's dataset represent 26.4 million participants, roughly half of all 401(k) participants in the country. Many of these plans are in private companies, which rarely offer company stock as a 401(k) investment option: plans with company stock are 2.6% of plans and 35% of participants. Among those companies that do have company stock, that stock represents 18.8% of plan assets, ranging from 7.7% for the smallest companies (up to 100 participants) to 19.0% for the largest (over 5,000 participants).

Newly hired participants are the least likely to have high concentrations of company stock. Among those hired between 2006 and 2013, 90% to 93% have less than half of their plan assets in company stock. By contrast, those numbers fall to 76% to 79% for those hired in or before 2001.

The EBRI research also shows that the percentage of plan assets in company stock varies significantly by employee compensation. Among plans with company stock, the lowest-paid employees (with $20,000 to $40,000) have 24% of plan assets in company stock. That percentage falls for each income bracket, with the highest-paid employees (with over $100,000 in compensation) having 15% of plan assets in company stock. Since company contributions may constitute a greater portion of all contributions for lower-paid employees, this difference may be the result of companies making 401(k) contributions in the form of company stock.

EBRI's founder and only CEO Dallas Salisbury announced that he will become president emeritus of the organization. EBRI expects to announce Salisbury's replacement on July 1.

Few Large Company 401(k) Sponsors Making Major Changes After Dudenhoeffer Decision

A survey from Callan Associates shows that few large company sponsors of 401(k) plans intend to make major changes in company stock in their plans in the wake of the Supreme Court decision in the Fifth Third Banc v. Dudenhoeffer case. The report, "2015 Defined Contribution Trends," provided survey data from 144 plan sponsors, 30% of which were non-government agencies and covered a wide variety of topics.

Of the 100 private companies in the survey, almost all offered 401(k) plans. Ninety percent of the respondents had over 500 employees. None reported having an ESOP. About 40% of the plans offered company stock, down from 50% in 2009. All plan sponsors that offer company stock reported taking some action to limit their liability. That including communicating about diversification (54.5%), hardwiring stock investments into plan documents (41%), and better tools to make diversification easier (34%). Some companies reported, however, that they would wait to see how the Supreme Court case plays out in lower courts before making final decisions.

New Study Finds Acquisitions by ESOP Companies Highly Successful

A new study presented at the recent Employee Ownership Fellows Program at Rutgers University by Suzanne Cromlish at Case Western Reserve found that acquisitions of other companies by ESOP companies have been strikingly successful.

Using a list generated by the NCEO from press sources and company histories on ESOP company Web sites, Cromlish focused on 20 ESOP companies that have done 442 acquisitions and 10 companies that were acquired by these companies. She did extensive structured interviews with various executives at each company. Just 12 of the 442 acquisitions were deemed unsuccessful. "Unsuccessful" acquisitions are outcomes such as the company failing, being bought back by the prior owners, or sold to another company because of difficulties integrating the new acquisitions.

Strikingly, Cromlish found that all of the companies doing the acquisitions said that retaining jobs at the target was either the main goal or one of the main goals. That is a very different agenda than the typical acquisition, where companies frequently announce that the acquisition will create greater efficiencies (which translates into fewer jobs). All but one of the executives interviewed in the target and acquiring companies said that creating a common ownership culture was a top priority in the acquisition process. Cromlish also found that 29 out of 30 executives discussed concepts of ethical values and altruistic behavior and 28 discussed concepts of open-book management.

Cromlish says that companies took "extraordinary steps" to make sure the integration process succeeded. These included one-on-one meetings, hot lines, dedicated contacts identified to link individuals in the target with people in the acquiring company, exchanging positions to give people a feel for the other company, and other programs. While Cromlish did not have comparative data for non-ESOP acquisitions, the literature is very clear that difficulties with cultural integration—not unrealized financial synergies—is the main reason so many acquisitions fail to live up to expectation.

Alabama Center for Employee Ownership: March 17 in Huntsville

The Alabama Center for Employee Ownership and the NCEO are hosting "Is an ESOP Right for You?" in Huntsville, AL, on March 17, 2015, from 9:00am to 3:00pm. Legal and financial experts and representatives from employee-owned companies will outline the possibilities and benefits of using employee ownership as an exit strategy. Register at nceo.org/r/Alabama or contact the NCEO's outreach coordinator Timothy Garbinsky (510-208-1310, tgarbinsky@nceo.org).

The meeting is free and will be hosted by a local employee-owned company. Lunch will be provided. Location and details will be provided to registrants.

This meeting is the inaugural event for the Alabama Center for Employee Ownership (ACEO). The ACEO, a volunteer organization composed primarily of Alabama based employee-owned companies, will be a resource for local businesses hoping to learn more about broad-based employee ownership.

Employee Ownership May Expand into China's State-Owned Companies

Roughly three-quarters of the companies in China's A-share market (for companies with share prices denominated in Chinese renminbi) offer some form of equity compensation, but only four publicly traded state-owned enterprises have similar plans. That may be about to change. A pilot program to have state-owned enterprises (SOEs) adopt employee stock ownership plans ("ESOPs," although distinct from the U.S. ESOP) is about to start, and it is expected to be followed by wider adoption of such plans. In the Chinese publication Global Times, Liu Tian writes that "employee-ownership reforms are needed at the country's SOEs. Based on private sector experience, ESOPs can motivate workers, improve profitability and cut waste. Data show that ESOPs can improve enterprise efficiency by as much as 30 percent."

Liu also notes, however, that "Reports say that all State companies with ESOPs in the pipeline will focus on core technical staff and managers, leaving little for rank-and-file workers," although he argues that a key to successfully changing the culture and performance of state enterprises is to provide substantial ownership to rank and file employees as well, noting "as there is already a quite sizable pay divide separating managers and common employees, excluding the latter from ownership reforms would only make an already alarming situation even worse."

UPenn Program for ESOP Company Executives

The Center for Organizational Dynamics at the University of Pennsylvania will again host "the first and only program anywhere formally addressing the relationship between the distinctive nature of ESOP companies and the effectiveness of leaders." The program consists of two week-long sessions (July 26 to 31 and December 6 to 9, 2015). Topics include the challenges and opportunities unique to leading an ESOP company, practical ideas to promote employee engagement, implications of recent research, and strategies for building a high-performance ownership culture. Attendees will also leave the program with a network of peers at other ESOP companies. More about the program is available online or by contacting the program's academic director Ginny Vanderslice (215-292-4865, virginiv@sas.upenn.edu).

NCEO Board Election Closes February 3

Members in good standing of the NCEO who have not yet voted for the NCEO's board of directors have one more day to cast their ballots before polls close at the close of business in California on February 3. All members should have received an email invitation to the ballot. If you believe you should have received an invitation to the ballot and you have not received one, please check your spam filter or contact our staff (email customerservice@nceo.org or call 510-208-1300) to request your member number or renew your membership.

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