ESOP Alert: Halloween Leftovers

Background.  As world markets are roiled by a Euro-reality show (Greece is about the size of Alabama with an economy that is less than that of the Dallas-Fort Worth metro area), I have been looking at several issues, including the “typical” contribution rate to an ESOP and the prevalence of equity grants to executives. Along those lines, here are two interesting items about ESOPs here at home.

ESOP as Retirement Vehicle. Principal Financial Group reports that ESOP companies have higher-than-average contribution rates to defined contribution plans, with an average rate of 11.9% of compensation. An especially interesting finding is that ESOP participants are more likely to contribute to a 401(k) plan than are employees in non-ESOP companies. Principal observes that the participation rate in the 401(k) plans for ESOP companies is 63.1% while the average participation in a 401(k) plan is 60.2%.” The report represents data from 37,000 plans and 3.7 million participants.

Equity as Compensation.  The NCEO recently has completed a survey of equity compensation practices in private companies. As it pertains to executive compensation, some highlights include:

 Forty-seven percent of the respondents use an outside appraiser to establish value for this purpose. The next most common response was to have the board set the figure with advice from an outside professional (20%).
 Almost all the companies give equity to at least some of their top executives; 77% of companies give equity to all of these employees.
 Two-thirds of the companies use stock options, with restricted stock being used by 29%. Phantom stock, stock appreciation rights, and restricted stock units are all used by less than 10% of the companies. The average percentage of equity held by non-founders through compensation awards was 15%.
These results were based on completed surveys from 201 companies and 32 service providers representing a broad range of entrepreneurial companies and not merely high-tech or pre-IPO companies.

Conclusion.  These revelations have no global import, but demonstrate that ESOP companies can have a powerful impact on their employees and executives.


Bob Musick, Titan Group LLC

Robert L. Musick, Jr. (804) 249-6027


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