The Employee Ownership Update
March 31, 2017
Research on the Prevalence of ESOPs as an Exit StrategyIn a March 2017 paper, Employee Stock Ownership Plans as an Exit Strategy for Private Business Owners, Alex Brill of examined a number of paths by which current owners may leave or sell part of their stake in their businesses. The study, sponsored by Employee-Owned S Corporations of America, looked at over 10,000 transactions that changed the ownership of privately owned companies during 2015. The results are in the table below.
| ||Percent of 2015 transactions|
|Domestic mergers and acquisitions||79%|
|Foreign mergers and acquisitions (i.e., a non-U.S. firm buys a U.S. firm)||15%|
|Private equity buyouts||4%|
|Initial public offerings (IPOs)||1%|
|Conversion to S corporation ESOP||1%|
New Data on Executive Compensation in ESOP CompaniesThe NCEO's ESOP Executive Compensation Survey collects and presents some of the only data on executive compensation specific to ESOP companies. We collected data for the latest installment of the survey from October 2016 to January 2017. Our online survey received 419 responses from a diverse group of companies with ESOPs, representing a 12% increase in responses over our last fielding of the survey in 2014. Respondents received a preview of results in appreciation of their participation. Highlighted findings include:
The full survey report is available for purchase. Members can download a free summary of the results in PDF format (member number and password required).
- Median total CEO compensation is $307,758. Median total compensation is $227,300 for CEOs of small companies (100 or fewer employees) and $380,900 for CEOs of larger companies.
- Just under one-third (31%) of the surveyed companies offer stock-based compensation to their CEOs. Of those that do, stock appreciation rights are the most commonly offered (51%), followed by phantom stock (28%).
- Stock-based compensation is most commonly awarded based on individual performance metrics (27%). Twenty-two percent of companies who award stock-based compensation do so annually, while 20% award it based on a company performance metric.
Private Equity Firm KKR Breaks the Mold by Sharing Ownership Broadly with Employees of Manufacturing CompaniesPrivate equity investors typically share equity ownership with a select group of very senior managers. The conventional (if empirically wrong) wisdom is that the top echelon of management can "move the needle" on the value of a company, and only the top people understand and value ownership.
The Industrials group at KKR, one of the largest private equity firms in the world, has recently moved in another direction. At several manufacturing businesses, including recently sold companies Capital Safety and Capsugel, as well as current holdings CHI Overhead Doors, KKR has distributed ownership broadly to all employees. In the Capital Safety example, the company had a workforce of 1,375; hundreds of employees earned more than $100,000, and the lowest payout was well into five figures. At a time when half the U.S. population is estimated to have zero savings, this can have a real impact.
KKR's industrial companies also institute high-engagement work practices, with demonstrated efforts to invest in the workforce, improve the work environment (for example, by improving worker safety in manufacturing plants) and get employees more tied in to the company's mission. KKR partner Peter Stavros, who is the head of the Industrials group, told the NCEO that he believes this combination of ownership sharing and high-engagement work practices has made their manufacturing businesses much more successful.
For a short video on changes made at Capital Safety, go to https://vimeo.com/156303226 and use the password "KKR Industrials." Pete Stavros can be reached at firstname.lastname@example.org.
The Pennsylvania Employee Ownership Industry SurveyAt its annual meeting in Harrisburg, PA, on February 28, the executive director of the Pennsylvania Center for Employee Ownership (PaCEO) released its survey of professionals in the employee ownership field. The survey found:
For more about the survey or the PaCEO, contact executive director Kevin McPhillips at email@example.com.
- 80% of respondents said their business grew "as a result of new ESOPs" in 2016.
- 86% were optimistic about their business prospects for 2017, 14% were neutral, and none was pessimistic.
- The top four reasons the respondents' clients are interested in employee ownership are succession planning, legacy, employee considerations, and tax benefits.
Employee Ownership in PolandPolish Deputy Prime Minister and Minister of Development and Finance Mateusz Jakub Morawiecki is a strong supporter of employee ownership and recently wrote a laudatory introduction to a new Polish translation of Equity: Why Employee Ownership Is Good for Business, published originally by Harvard Business School Press in 2005. It was authored by NCEO founder Corey Rosen, NCEO board member John Case, and Martin Staubus of the Beyster Institute.
Morawiecki wrote that "We should focus on creating mechanisms that will enable Polish people to make a profit out of capital rather than their own work alone. On the one hand, this capital will increase national savings by gradually leveling out Poland's negative investment balance; on the other hand, it will help the economy, companies, and people grow."
The NCEO's New Board of DirectorsToday marks the first day in the terms of seven new directors at the NCEO:
The NCEO thanks the four directors whose terms just ended: Steve Baker, Adele Connors, James Mauch, and Tom Roback. James Mauch served as board secretary from 2014 to 2016. Tom Roback served as the board chair from 2013 to 2015.
- Rich Armstrong, Great Game of Business and SRC Holdings Corporation
- John Case
- Kevin Long, Chang, Ruthenberg & Long, PC
- Sandra Reid, The Davey Tree Expert Company
- Glenn Ripley, Mission Bell Manufacturing
- Bill Roark, Torch Technologies, Inc.
- Joanne Swerdlin, Swerdlin & Company
The members of the board are in the board directory.
Newsletter Article on State Capital Gains: ClarificationThe summary chart accompanying the March-April 2017 Employee Ownership Report article on State Capital Gains Taxation in §1042 Transactions indicated that New Jersey does not follow the federal definition of taxable income. However, New Jersey's tax code does include a special rule providing that "'net gains or net income' shall not include gains or income from transactions to the extent to which nonrecognition is allowed for federal income tax purposes," so sellers to an ESOP could arguably defer New Jersey capital gains tax through a 1042 election. Those considering a sale to an ESOP in New Jersey should discuss with their tax advisors whether these circumstances apply to their sales.
Author biography and other columns in this series