The Employee Ownership Update
April 17, 2017
The Encouraging Employee Ownership Act Passes the HouseOn April 4, the House passed the Encouraging Employee Ownership Act (H.R.1343) by a bipartisan vote of 331 to 87. The bill would ease current Securities and Exchange Commission rules, making it easier for private companies to provide stock-based compensation to employees. The bill would increase to $20 million the current $5 million cap on the amount of stock closely held companies can award employees before triggering certain SEC reporting requirements. The amount would be indexed for inflation annually. The bill was received in the Senate and referred to committee.
Court Grants $9.5 Million Award to Plaintiffs in ESOP Valuation CaseIn a 158-page decision (Perez v. First Bankers Tr. Servs., Inc., No. 3:12-cv-04450 (D.N.J. March 17, 2017), a district court ordered First Bankers Trust (FBT) to pay almost $9.5 million to the plaintiffs for failing to adequately protect the interest of ESOP participants by allowing the ESOP to overpay for the shares from the owners of SJP Services. SJP provides site development for residential construction in New Jersey. The ESOP paid $16 million to buy the company's shares in 2007 (a price at the low end of the valuation range). The company subsequently saw a significant decline in stock price during the housing recession.
The court questioned reliance on company projections about income and diversifying its concentrated customer base in light of what the court believed were inadequate representations about the likelihood of either happening, including that the appraisal relied heavily on using the company's best year (2006) as a key number in making its projections. The court concluded neither the appraiser nor FBT took adequate steps to find additional information beyond what management provided, nor to question the likelihood of strong results continuing. The court also questioned the valuation of the company's technology assets. The court also agreed with the plaintiff that FBT did not adequately document what it did.
The decision is one of the most detailed yet in assessing the appraisal process, but breaks no new ground on what standards to use, turning instead on competing views of what a reasonable appraiser would have determined given the facts available.
The NCEO's ESOP Executive Compensation SurveyThe prior Update included some highlights from the NCEO's ESOP Executive Compensation Survey, which collects and presents some of the only data on executive compensation specific to ESOP companies.
Respondents provided data on base pay, cash incentive pay, stock-based incentive pay, and deferred compensation. The survey also covered a range of other topics connected to compensation, such as forms of equity compensation, vesting schedules, and corporate governance issues. The total annual compensation for the top seven officers in ESOP companies is in the table below.
|Median Total Pay (base pay plus cash and stock-based incentives)|
|Top Divisional VP||$220,000|
|Top Manu/Prod/Svcs VP||$170,486|
Employee Ownership Dwindling in Technology Companies?In Tech Companies Are Shutting Employees Out of the Stock Market's Boom on the Fortune magazine website, Joseph Blasi observes that "the percentage of employees with equity stakes in innovative industries, such as computer services, declined from over half of all employees in that industry in the early 2000s to about a fifth of all employees by 2014."
What's behind the decline? Dr. Blasi argues that there are many factors: changes in the tax code changed the incentives for public companies to maintain ESOPs, companies reacted to stock option accounting standards by providing option grants to fewer employees, and the declining generosity of employee stock purchase plans.
He argues that these changes have led many HR practitioners to a new theory of compensation, based on the idea that "only executives and a few percent of top employees can really impact the bottom line and only they should have shares." He notes that "this view is held in spite of the fact that decades of scholarly research on broad-based employee share ownership concludes the opposite."