Section C. Plan description

Question 8. Question 8 asked the type of plan.

87 percent indicated they had a stock bonus plan.

13 percent indicated they had a stock bonus plan and money purchase pension plan.

Question 9. In question 9 they were to indicate the length of time the plan had been in effect to the nearest month.

The mean of the response was 36.4 months, or about 3 years with a low answer of 6 months and a high of 7 years 9 months.

Question 10. Question 10 asked how many months were required to install the plan. Here the team found a mean of 7.8 months with a high figure of 43 months and a low figure of 0. One answer was a cryptic-"Too Long.' Question 11. Question 11 asked whether a "liquidity analysis" or "dilution study" was done prior to implementing the plan.

46 percent answered Yes.

54 percent answered No.

Question 12. The team asked the responding companies to check the total amount of trust assets in question 12 in categories. Here, the category with nearly 40 percent of the responses was $100,001-$500,000. The remainder were roughly equally divided.

Note here that it is natural to expect the longer the period of time the plans have been in effect, the larger the amount of total trust assets.

Question 13. The term broke the annual contribution sizes of question 13 into six categories.

Over one-half of those responding fell into the range: $50,001-$500,000 which includes two categories:

1. Twenty percent were in the category $25,000 or less.

2. Many companies did not answer specifically, saying that the amounts contributed may vary annually, so they were unable to give an accurate answer. Question 14. Question 14 asked the form of contribution.

The response was: Stock with 32 percent of the companies, cash with 40 percent, and a combination of stock and cash with 27 percent.

Fifty-three percent responded "yes" when asked if the form of contribution

varied.

Of the 47 percent who said “no, it did not vary," some companies indicated that it may vary in the future.

Question 15. Question 15 tried to determine if the ESOP was formed by the conversion of a previous benefit plan. Example: conversion of profit sharing to ESOP.

30 percent responded yes.

70 percent responded no.

When asked if the ESOP was combined with any other benefit plan, 27 per cent responded “yes.”

The last part of this question asked what types of plans are combined with the ESOPS.

The largest block responding indicated profit-sharing plans (45 percent). The others included various types of pension plans.

Question 16. Question 16 asked if the plan is leveraged (i.e., has it ever obtained a loan?)

16 percent responded "Yes".

84 percent responded "No".

Unfortunately, the question of whether the companies would consider the possibility of future "leveraging" was not asked, but some companies volunteered the information that they would be "leveraging" in the future.

Question 17. Question 17 asked what types of securities the plan holds.

The responses were: Common, 87 percent; preferred, 10 percent; and, combination common and preferred, 3 percent.

Question 18. Question 18 asked for the vesting requirements.

The responses were divided into three separate categories:

6 percent indicated they had immediate vesting.

9 percent said they had followed the statutory maximum, which is a schedule with total vesting in 15 years.

85 percent had a gradual vesting.

Of the 85 percent majority with gradual vesting, well over half had the standard "10 year and 10-percent per year program," while the remainder had varied periods of from 3 to 12 years for total vesting.

Question 19. Question 19 asked if the plan carries life insurance.

16 percent responded "Yes".

84 percent responded "No".

Of those saying "yes," the majority (over 80 percent) stated the insurance was on key people only.

Question 20. Question 20 asked if the plan provides for a "Put."

42 percent responded "Yes".

58 percent responded "No".

For the average length of time of the "put", the team computed 9 months with a range from 1 month to infinity.

The most frequent figure was 3 months.

The question was asked before the recent requirements of the ESOP regulations. A "Put" is a mechanism whereby a terminating employee who receives his shares can sell them at market price either to the company or the ESOP for a certain period of time.

Question 21. Question 21 asked how stock is distributed to vested employees upon termination, and what particular requirements the plan has.

The answers set out a great variety of methods which are not delineated in the study.

Some indicated they had not yet had a distribution.

Question 22. Question 22 asked if the plan was audited by independent accountants.

Question 23. Question 23 asked if there was a formal accounting procedures or allocation manual.

66 percent of those responding indicated that there was a formal accounting procedures or allocation manual.

Question 24. Question 24 asked how often a stock appraisal was done and by whom.

The response was that 88 percent have annual appraisals. Of the appraisals performed, 47 percent were done by independent appraisals, 23 percent by auditors, and the rest by others (20 percent). (13 percent of sample were publicly traded stocks.)

Question 25. Question 25 asked who provides the legal services for the plan and the majority indicated they were provided by outside corporate counsel. Question 26. Question 26 asked who provides administrative services to the plan.

The responses indicate that the work is split about evenly between internal and external groups (40 percent internal, 60 percent external).

Of companies using internal groups, the accounting department does the majority of the work and of the external groups, the professional plan recordkeeper does the majority.

Question 27. Question 27 asked who served as the plan's trustee.

The responses indicated that individuals serve as the plan's trustee 23 percent of the time and the remainder of the trustees are divided equally between institutions and committees (38 percent each).

In questions 24-27 the team asked the respondents to rank on a scale of 1-5 whether they were satisfied with the particular administrative services they were receiving or providing.

In each of these areas; stock appraisal, legal services, general administration and trustee, at least 50 percent indicated they were highly satisfied by checking 5's. So, in all administrative areas, satisfaction was high. It should be noted that some who responded to this question may have been plan administrators themselves.

Questions 28 and 29. Questions 28 and 29 asked about initial and ongoing costs. It appears that only the figures for total expenses are meaningful, both because of the wide range of responses and because of the difficulty the companies seemed to have in estimating the cost of the work that was done internally. Note. There were, in addition, three companies with as many as 40,000 or more employees and their costs were so much greater than any of the others that the team took these figures out for the purposes of calculating the totals. For question 28, the computed "mean" cost of installation was: $12,204 with a minimum of $500, and a maximum of $52,000. For question 29, the mean annual costs were computed to be: $5,766 with a minimum of $500, and a maximum of $25,000.

Section E and section F

Section E of the questionnaire asked about the realized benefits and advantages and Section F asked about the problems with the plan.

The team asked them to rank each of the factors on a 0-1-2 scale with: 0=Not a factor

1 Less important

2 Important

In section E, regarding Realized Benefits/Advantages

The team had the following results.

The 5 "benefits" with the highest mean response were as follows:

1. Improved Employee Motivation.

2. Tax Advantages.

3. Market for Closely Held Stock.

4. Estate Planning.

5. Cash Liquidity.

The 4 "benefits" with the lowest mean response, starting from the least important, were:

15. Issuance of Stock without registration.

14. Defense against takeover.

13. Recapture of taxes paid in prior years.

12. Divestiture, or acquisition plans.

Section F

In Section F, "Problems with the Plan", the team found two major problems. 1. First, changing governmental regulations.

2. Administrative complexity.

From the initial research the team did prior to the study, it was concluded that dilution would be a major problem, however, in analyzing the data, for the majority of responding companies, it was not a problem.

Note However, that many of the minority felt they had a serious dilution problem.

Consider also that these last few years have been especially difficult for ESOPs because of the constantly changing regulations, lack of definitive regulations and guidelines from the Internal Revenue Service and the Department of Labor and the inexperience of many plan sponsors and their advisors. Plan sponsors now have the assurance of relatively fixed regulations, as well as many sources of published material on ESOPs.

Section G. Perceived employee reaction

Section G, Perceived Employee Reaction. The team asked not for employee reaction, but for perceived reaction by the person filling out the questionnaire. There was no discernable overall change between the employee opinion of the plan at the time of installation and current employee opinion.

The mean response in both cases was 3.8.

However, many firms indicated a change in opinion since installation. Some indicated the employee opinion had improved and some that it had dropped. In the third question, the current employee understanding of the plan was not perceived to be good.

At best it can be described as "fair" with a mean response of 2.9 on a scale from 1 to 5.

The team received one comment suggesting that ESOPs be wrtten in "English". The responses to the question about the plan's ability to compete with other benefit plans in keeping or attracting personnel was:

3.4 on the 1 to 5 scale

Section H. Overall evaluation

In the Overall Evaluation, Section H, the team asked whether the plan was living up to expectations and how important the plan was to the company. In both cases, the response was 3.8 in a scale of 1 to 5.

The responses to the question, "How complicated do you consider your plan?", had a mean response roughly in the middle and was given a numerical assignment of 3.2 on the 1-5 scale.

33-902 O - 78 - 35

The last question was

"Would you install one again?"

The response on a scale of 1-5 had a mean of 4, and this was the highest mean the team had in these last two sections of the questionnaire.

The responses showed that the majority was, indeed, very happy and would install one again. BUT some of those who commented gave very strong negative opinions.

Ordering the complete survey

The actual survey is extremely informative, and may be ordered from the ESOP Council of America, 11661 San Vicente Boulevard, Los Angeles, California 90049, Attention: Robert W. Smiley, Jr. The Council would welcome suggestions for further studies.

STATEMENT OF O. C. DAVIS, CHAIRMAN, PEOPLES GAS Co.

Peoples Gas Company submits for the record this statement of its Chairman and Chief Executive Officer, Mr. O. C. Davis, to express its support for S. 3241. the "Expanded Employee Stock Ownership Act of 1978," which was introduced by Chairman Long on June 23, 1978.

Peoples Gas Company is the parent corporation of an integrated system engaged in the production, interstate transmission, and local distribution of natural gas. We supply approximately 75% of the gas consumed in the Chicago metropolitan area.

The concept of employee stock ownership is one that the Committee on Finance has been influential in developing and strengthening over the past five years. The Finance Committee's amendments which established the TRASOP concept in the Tax Reduction Act of 1975 and which honed the concept through technical amendments in the Tax Reform Act of 1976 enabled Peoples Gas Company to be among the first in the nation to establish an investment credit ESOP. Peoples Gas Company regards its Plan, the Peoples Gas System Employe Stock Ownership Plan and Trust, as an unqualified success. For the plan year ending September 30, 1976, the first year of the Plan's existence, there were 6,110 participants in the Plan, representing 89.9% of all Peoples Gas System employees. The employer contribution for this plan year amounted to over $2.2 million, representing an average allocation to each participant of $374.19 or 10.16 shares of Peoples Gas Company stock. For the plan year ending September 30, 1977, there were 6,085 participants in the Plan representing 90.1% of all System employees. The total employer contribution for this year decreased to approximately $1.2 million, paralleling the reduction in the System's available investment tax credit for that year. The Plan has been very favorably received by all Peoples Gas System employees. All available information indicates that it is regarded as a very valuable employee benefit.

We welcome the opportunity to submit this testimony in support of the concept of employee stock ownership plans in general, and S. 3241 in particular. These hearings are particularly timely for our company in view of our testimony before the House Committee on Ways and Means last March during its hearings on the Administration's tax reform proposals.

We believe that S. 3241 will help alleviate the economic problems facing our country as a result of capital shortages and concentrated equity ownership. The additional investment tax credit will be especially important to the capital intensive natural gas industry and, in particular, to our company.

America's natural gas industry is the most efficient energy distribution system in the world. Everyday our transcontinental network of pipelines, storage facilities and local distribution lines moves massive quantities of clean nonpolluting energy from producing wells directly to consumers, efficiently and inexpensively. We in the gas industry are aware of our responsibility to maintain the integrity of natural gas as a national asset, and the major role we must play in helping this country meets its long-term energy requirements.

Until a few years ago, the ready availability of natural gas enabled our industry to supply our customers with a premium fuel at bargain-basement prices. Now, as existing low cost supplies of natural gas become depleted, unprecedented capital investments will be required to develop new sources of gas-traditional and nontraditional-in order to permit us to maintain service to our markets.

The capital needs of Peoples Gas Company will also increase substantially over the next 10 years because of the large capital requirements for projects necessary to maintain service to our markets and to enable us to explore for and develop new sources of gas. We are making large capital commitments to develop alternatives to traditional sources, such as synthetic natural gas and liquefaction facilities to permit foreign natural gas to be imported, liquefied, stored, and regasified. Consequently, Peoples Gas Company's estimated investment requirements will amount to more than $6 billion over the next decade, which constitutes a tripling of the investment accumulated over our 120 years of existence.

In view of these future needs, we support the proposed 2% investment tax credit for ESOPS. The enhanced ESOP investment tax credit will benefit our employees by providing them with increased savings; our company, by providing it with needed capital to maintain and expand our ability to serve our customers, and by providing our employees with an increased sense of ownership, and our customers, by providing them with better service. Accordingly, we believe that S. 3241 will make a substantial contribution to the great challenge of raising the capital needed to help insure a healthy future for America's energy requirements. Peoples Gas Company supports the expansion of the ESOP concept as an important factor in broadening equity ownership and increasing employee incentive. While we are part of a capital intensive industry, we recognize the needs of other less capital oriented companies in broadening their stock ownership and increasing employee incentives. Thus, we also support the extension of the ESOP availability to labor intensive employers by providing a tax credit of up to 1% of wages paid each year provided an equivalent amount is contributed to an ESOP. We thank the Committee for this opportunity to express our support for the concept of employee stock ownership, and urge you to act favorably on S. 3241 this session. The expanded use of ESOPS will greatly help in broadening equity ownership, increasing employee incentives, and alleviating the problems of capital formation.

STATEMENT OF THE NATIONAL RETAIL MERCHANTS ASSOCIATION

The National Retail Merchants Association ("NRMA") is submitting this comment in respect of S. 3241, the "Expanded Employee Stock Ownership Act of 1978", introduced by Senator Long ("the bill"). The NRMA is a nonprofit trade association representing over thirty-five thousand leading department, chain and specialty stores in the United States, many of which are operated by small retailers. The aggregate annual sales volume of our members is in excess of $95 billion.

Most retailers are labor-intensive enterprises and retailers employ a large percentage of the nation's labor force. In 1976, retailing enterprises had a payroll of $79 billion and employed approximately 13.4 million workers, one out of every six employees in the nation. Between 1970 and 1976 nine million new jobs were created by all sectors of our national economy; more than two million of these new jobs, nearly one out of four, were in the retailing sector. Additionally, our industry operates on a profit margin which is relatively low in comparison to most other labor-intensive industries. Retailing is required to employ its caiptal resources predominantly in payroll, inventory, receivables and other current working capital requirements, which are generally ineligible for Tax Reduction Stock Ownership Plan ("TRASOP") benefits because the capital expenditures are generally ineligible for the investment tax credit. (TRASOP was implemented by the Tax Reduction Act of 1975, allowing an increase of 1 percent in the investment credit on qualifying property if an employer contributes an equivalent amount to an employee stock ownership plan "ESOP").) In sum, retailing has essentially been denied the benefits to be derived from TRASOPS because retailing is a laborintensive industry.

GENERAL COMMENTS

Essentially the bill seeks to remedy the situation as regards TRASOPS for labor-intensive industries and would provide employers with a tax credit equal to the greater of (i) one percent of the wages paid each year to employees or (ii) two percent of property qualifying for investment tax credits, provided that property in an equivalent amount is contributed to an ESOP. At least one-half of the amount contributed to the ESOP must be newly-issued employer securities. The predominant reasons for such a program are to aid capital formation and offset the serious shortage of capital in the United States. Furthermore, by en