57% of 100 Best Companies have Broad-Based Ownership
The February 17, 2009 Employee Ownership Update is online and discusses the following:
More Than Half of Best Companies to Work for Have Broad-Based Employee Ownership
BLS Data on Stock Option Participation Show Little Change
Radford Research Shows Equity Award Exchange Patterns
The Update notes that 57% of the 100 Best Companies to Work for 2009 have broad-based employee ownership plans:
Six of the companies—W.L. Gore & Associates, PCL Construction Enterprises, TDIndustries, Burns & McDonnell, CH2M Hill, and Publix Super Markets—are majority owned by their employees. Nine have only an employee stock purchase plan (ESPP), 11 have ESOPs, 17 have option and/or restricted stock programs covering most employees, and one has a direct stock purchase program and internal market (CH2M Hill). The number of companies using restricted stock has gone up sharply from prior years, while the number of companies with only ESPPs has declined.
The Update also discusses the results of the National Compensation Survey (NCS), an annual survey performed by Bureau of Labor Statistics:
The National Compensation Survey (NCS) provides comprehensive measures of occupational earnings, compensation cost trends, the incidence of benefits, and detailed benefit provisions. This bulletin presents estimates of the incidence of benefits for the Nation. The estimates include benefits for workers by ownership within the U.S. economy in 2008—civilian, private, and State and local government—and by various occupational and establishment characteristics. The civilian economy, by NCS definition, excludes Federal government, agricultural, and household workers.
The Employee Benefits Survey, a survey of compensation and benefits practices, found that the percentage of workers receiving stock options has remained unchanged:
The percentage of workers receiving stock options in 2008 was unchanged from previous years, according to the Bureau of Labor Statistics. Its March 2008 data show that 8% of the 107 million private sector workers surveyed received options (more may be eligible but not have received them that year). This is essentially the same percentage it has been for the last few years given the margin of error in the survey. That suggests that broad-based equity plans, contrary to conventional wisdom, are not a relic of the past.
It also provides a link to Radford's Underwater Exchange Portal, a resource for providing guidance on underwater employee stock options, and the results of a recent survey on stock option exchanges. Shareholders Demand Executive Exclusion, Value Neutrality in Underwater Stock Option Exchange Proposals, According to Aon Consulting's Radford Research provides more details:
San Jose, Calif. – February 9, 2009 – With a surge in the number of underwater stock option exchange proposals, four shareholder-friendly design features are gaining consistent institutional investor approval, according to a new study conducted by Aon Consulting's Radford Surveys + Consulting. This study identifies the exchange design elements in mutual fund voting patterns that figured most prominently in successful approvals, and analyzes voting results for specific investors, industries and timing considerations.
These four shareholder-friendly approaches include: option holder eligibility; grant eligibility; old-to-new award exchange ratios; and new award vesting requirements. Approval rates were higher when any of the four design features complied with the shareholder-friendly approach vs. non-compliance. Further, the highest approval rates (79 percent of proposals) came when all four design features followed the shareholder-friendly approach.
"Repricings elicit a negative connotation and some Directors and executives have automatically pigeon-holed them as being bad," said Brett Harsen, vice president, Radford Surveys + Consulting and study author. "This research demonstrates an approval rate of nearly 80 percent for these new responsibly-balanced proposals, and we believe that will be a surprise to many."
The following describes each of the four design features in detail:
Exclusion of Board and Named Executive Officers (NEOs)
Sixty-two percent of programs excluding Board members and NEOs gained approval, compared to only 18 percent that included them. In fact, 60 percent of the mutual funds in this analysis voted against any program brought to them that included the Board and NEOs.
Price floor above the 52-week high stock price
Starting in 2008, institutional investor advisory firm RiskMetrics Group added to their voting guidelines that no options priced under the company's 52-week stock price high should be eligible for exchange, as they have reasonable probability of coming back in the money in the foreseeable future. According to Radford's analysis of historic voting patterns against the 52-week test, this feature is the least sensitive predictor of approval rates with 59 percent approval when programs comply and 41 percent approval when they do not.
Value neutral exchange rate
Returning an equal or lesser award value to option holders as a result of the exchange clearly was a deciding factor to shareholders in the Radford study. While 54 percent of programs using approximate value-neutral exchange rates gained approval, very few (two percent) were approved using a ratio (or ratios) that added value to the employee's holdings as a result of the exchange.
Reset vesting
The Radford research also found programs that reset vesting had an approval rate of 57 percent, compared to those that mapped vesting, which saw only 18 percent approval.
While these four design elements featured prominently in successful exchange proposals, more mature organizations that are largely held by institutional investors must be careful when using recent underwater option exchanges filed with the SEC as best practices benchmarks, according to Harsen.
"Many recent exchanges filed with the SEC were executed by smaller companies that could afford to be more aggressive because they were closely held by a group of more familiar investors," notes Harsen. "For more mature companies, it's critical that they look at preferences of institutional shareholders reflective of their actual investor base."