The Employee Ownership Update
January 4, 2016
Results of the ESOP Transaction SurveyThe NCEO's first-ever ESOP transaction survey shows a number of trends in how companies structure, manage, and evaluate ESOP transactions. Data from the 240 companies that responded to the survey between February and September 2015 is the first attempt to gather the experiences of a large, diverse group of companies about the scope, management, and satisfaction with ESOP transactions.
One limitation of this study is that the transactions spanned substantial developments in the ESOP field, especially the fiduciary process agreement between GreatBanc and the Department of Labor. Appraisal standards, fiduciary scrutiny, and transaction structures are all different for the later transactions covered by this survey than for the earlier transactions. A second limitation is that the respondents represent a minority of all ESOP transactions, and there may be some bias in their behavior since many are likely members of the NCEO. Readers should exercise caution in drawing conclusions about ESOPs in general. Nothing in these results should be construed as a recommendation or a description of a best practice. Anyone considering an ESOP transaction should consult with qualified professionals who have expertise with ESOPs.
Some highlights of the findings include:
- The number of initial transactions for a minority of shares declined only slightly (from 44% of all transactions in 2010 and earlier to 40% after 2010).
- The number of initial transactions that involved 100% of the shares of the company increased dramatically, from 38% for 2010 and earlier to 56% for after 2010.
- The median amount of time it took responding companies to complete their transactions was six months.
- The majority of transactions included in this data (72%) were leveraged, and for the majority of those (60%), loans funded the entire amount of the transaction.
- Almost half of the transactions (46%) used at least some seller financing.
- Most transactions (63%) reported in this survey did not make use of the Section 1042 rollover.
- Many factors affect the cost of an ESOP transaction. Three that emerged from these results are the year of the transaction (more recent transactions are more likely to cost more), the number of services used, and the percentage of shares purchased.
Two Companies, Two Outcomes: The New York Times on Equity CompensationIn the last week of 2015, the New York Times ran two articles featuring the equity compensation plans at two very different companies. The first article noted that the company Jet.com is aiming to take on Amazon, both by competing with it and by following a radically different employee relations strategy. While Amazon has a reputation for driving its employees hard, Jet.com's CEO Marc Loren says, "I'm constantly asking people at Jet if they are happy." Amazon once had a broad-based stock option plan, but it no longer does. Jet.com provides options to all of its employees. Jet is also committed to measuring job satisfaction. Its first employee survey found that 87% of employees rated the company as a great place to work, an unusually high response for this kind of question (a recent Deloitte survey said half of employees would not even recommend their employer).
The second article told about the fate of employee stock holders at Good Company. Many employees there received stock grants of common shares. The company had planned an IPO, but ended up being bought by Blackberry for an amount that valued common shares at $0.44 per share, down from the prior year price of $4.32 per share. Although the specifics at Good Company are unclear, many experts recommend that private companies with equity compensation plans be designed to ensure that equity awards be liquid after exercise.