Treasury Comments on ESOP Price Protection/Floor Price Agreements
The June 1, 2011 Employee Ownership Update is online and discusses the following:
- Treasury Official Expresses Doubts About Floor-Price Protection in ESOPs
- Research on the Behavioral Impact of Stock Options
- Employee Ownership and Loyalty
- Raising Money for Charity at Brookshire Brothers
- Pam Chernoff Moves to CEPI
The Update discusses how Treasury discussed ESOP Price Protection/Floor Price Agreements at the annual ESOP conference and how it could be viewed as a participant benefit, an agreement with the ESOP, or a side agreement with the company:
Citing possible fiduciary and tax concerns with floor-price protection in ESOP companies, William K. Bortz, associate benefits tax counsel at the Treasury Department's Office of Tax Policy, said that the practice raised unanswered questions. The value of ESOP shares often declines significantly following a leveraged transaction, and floor-price protection is designed to insulate the people who leave the company during that often-temporary depression in the stock price. The NCEO's 2010 survey on repurchase obligation practices found that fewer than 10% of ESOP companies offer floor-price protection, and another 21% will consider doing so.
Speaking at the ESOP Association's annual conference on May 13, Bortz noted that since floor-price protection is temporary, any benefit it provides one participant is offset by reduced benefits to other participants. Bortz called this situation "a zero-sum game" and suggested that it "presents fiduciary problems." Bortz also said the question of how floor-price protection should be viewed was unanswered, suggesting that it could be considered a participant benefit, an agreement with the ESOP, or a side agreement with the employer. He noted that which of these three views of floor-price protection prevailed would affect several aspects of ESOP taxation.
It also discusses Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company, a study on the behavioral impact of stock options that found a positive relationship between the value of a stock option and the subsequent job performance:
We investigate gift exchange relationships in real jobs, making use of a field quasi-experiment associated with the exercise of stock options for roughly 4500 managers in a large public company. In this company, option grants are set equally for all employees within occupational categories, and financial markets set the price at which the options are ultimately exercised. We assert that the considerable variation that we observe across employees and over time in profits from those sales is beyond the control of the individual employee and can be thought of as effectively randomized. We also assert that employees perceive the profit they receive from exercising these options at least in part as the equivalent of a gift: Higher profits in turn cause them to reciprocate with better job performance in the subsequent period. We find significant and economically meaningful positive relationships between the variation in profit per share of the options sold and standard measures of subsequent job performance for individual employees. These effects exist in real jobs and persist over long periods, extending previous studies. Non-parametric and parametric fixed effects models, other controls for sample heterogeneity, and alternative specifications address possible concerns about the randomization assumption and associated statistical issues.