2 Compensation and Working Conditions Fall 2000

WILLIAM J. WIATROWSKI

Putting Stock in Benefits: Putting Stock in Benefits: Putting Stock in Benefits:

How Prevalent Is It? evalent Is It?

William J. Wiatrowski is an economist in the

Division of Compensation Data Analysis and

Planning, Bureau of Labor Statistics.

Telephone: (202) 691-6255

E-mail: wiatrowski_w@bls.gov

The BLS National Compensation

Survey (NCS) provides a diverse set of measures of employee compensation.1 Many factors

go into the computation of these statistics, including wage rates, hours

worked, number of workers receiving

certain benefits, and the cost of those

benefits. Employers provide a variety

of benefits, such as insurances, time

off arrangements, and retirement plans.

Recently, analysts have been especially interested in one particular class

of compensation—plans that invest in

or provide workers with company

stock. 2

Such “equity compensation” plans

are not new, although the variety of

plans that use stock has expanded in

recent years, especially since the introduction of section 401(k) of the

Internal Revenue Code in 1978. The

National Compensation Survey (NCS)—

an integrated program designed to estimate local, regional, and national

wage rates, the cost of wages and benefits to employers, the share of workers receiving various benefits, and the

details of benefit provisions—currently

collects some data on stock-related

benefit plans, if such plans are qualified defined contribution plans as specified by the Internal Revenue Code.

The remaining discussion in this

article details the current treatment of

stock-related plans. (See table 1.) Of

particular interest is the treatment of

these plans in employer cost estimates.

The article also explores the concern

that the exclusion of certain types of

stock plans may result in incomplete

compensation data, and outlines the research the Bureau of Labor Statistics

has sponsored to include additional

forms of stock-related compensation in

its data.3

Stocks and the Employment Cost

Index

The Employment Cost Index (ECI), one

of the components of the National Compensation Survey, was first published

in 1975, reporting on changes in employer cost for wages and salaries in

private industries. Throughout its 25-

year history, the index has been expanded and revised in an effort to capture current compensation practices.

Benefits were added to the index in

1980, and State and local government

workers were added in 1981. In addition, benefit definitions have been refined and updated throughout the period. For example, in the early 1990s,

changes to the retirement definition

were made to ensure that the rapidly

Benefits that provide workers with stock or that invest in

stock are becoming more prevalent; BLS captures data

on some of these plans and is conducting research on

those plans not currently captured.
 Compensation and Working Conditions Fall 2000 3

Putting Stock in Benefits: How Prevalent Is It?

TABLE 1. Benefit plans that provide for or invest in stock, and their treatment in various compensation

measures by the National Compensation Survey

Savings and thrift ......................................... X X X

Money purchase pension ............................ X X

Deferred profit sharing ................................. X X X

Employee stock ownership plan.................. X X

Stock bonus ................................................. X X

Simplified employee pension ........................ X X

Stock purchase ............................................ X

Stock option .................................................. X

Defined benefit pension................................ X X X

Included in measures

of employer

compensation costs

Data available on

percent of workers

eligible for or

participating

in the plan

Data available on

detailed plan

provisions

Type of plan

growing incidence of defined contribution plans was properly recorded.

Defined contribution plans. Defined contribution plans. Currently,

only those plans involving stock that

are qualified as defined contribution

plans for Federal tax purposes are included in the ECI. For example, 401(k)

plans in which the employer matching

contributions are invested in company

stock are included in the ECI; such

plans are qualified defined contribution

plans.

For purposes of computing the ECI,

the cost of defined contribution plans

typically is determined by obtaining

the employer’s contribution, without

regard to the potential investment of

these funds in company stock or some

other investment vehicle. For example,

consider a plan that allows employees

to contribute up to 10 percent of earnings, with the employer matching onehalf of the first 6 percent of earnings

contributed by the employee. In such

a plan, the maximum contribution by

the employer is 3 percent of employee

earnings (one-half of the 6-percent

employee contribution) or about $1,200

in the case of a worker earning $40,000

per year. As wages change, the change

in employer contribution would be captured by the survey. Similarly, if the

plan provisions change, any resulting

change in employer cost would be captured. These data are recorded for the

ECI and the estimates of employee compensation cost, regardless of how the

employer funds are invested. (See table

2.) As discussed below, such employer

funds often are invested in employer

stock.

The defined contribution plans described in the preceding discussion are

considered savings and thrift plans by

the National Compensation Survey.

Other types of defined contribution

plans are deferred profit-sharing plans,

money purchase plans, employee stock

ownership plans (ESOPs), stock bonus

plans, and simplified employee pensions (SEPs). (See box for definitions

of these plans.) Regardless of how

funds are invested, the employer’s

contributions to these plans are included in the ECI. Use of the

company’s own stock is almost universal in ESOPs and stock bonus plans

but is also found in other defined contribution arrangements.

Defined benefit plans. Defined benefit plans. Investment in

employer stock also may occur indirectly through a defined benefit pension plan; such plans are also included

in the ECI. Defined benefit plans

Total compensation ........................................... $21.16 100.0

Wages and salaries ..................................... 15.36 72.6

Total benefits ................................................ 5.80 27.4

Paid leave ............................................... 1.42 6.7

Vacation ............................................. .65 3.1

Holiday .............................................. .48 2.3

Sick leave .......................................... .21 1.0

Other leave ....................................... .07 .3

Supplemental pay ................................... .55 2.6

Premium pay for overtime ................ .22 1.0

Shift differential .................................. .05 .2

Nonproduction bonuses ................... .28 1.3

Insurance ............................................... 1.36 6.4

Life insurance ................................... .05 .2

Health insurance ............................... 1.25 5.9

Short-term disability .......................... .04 .2

Long-term disability ........................... .03 .1

Retirement .............................................. .77 3.6

Defined benefit .................................. .43 2.0

Defined contribution .......................... .34 1.6

Legally-required benefits........................ 1.67 7.9

Social Security .................................. .98 4.6

Medicare ........................................... .25 1.2

Federal unemployment insurance ... .03 .1

State unemployment insurance........ .09 .4

Workers’ compensation .................... .33 1.6

Other benefits ......................................... .03 .1

TABLE 2. Employer costs per hour worked for employee compensation, and costs

as a percent of total compensation, civilian workers, March 2000

Percent of total

compensation Compensation component Employer cost
4 Compensation and Working Conditions Fall 2000

specify a formula for computing retirement benefits, typically based on earnings and service. The cost of such plans

is the amount that must be contributed

to the plan in a given period to meet

the actuarial standards imposed by law.

The ECI typically captures the employer

contribution to the plan (to meet the

actuarial standards) plus any administrative cost of operating the plan (including Pension Benefit Guaranty Corporation premiums).4 The plan sponsor

(typically the employer) bears the burden of providing sufficient funds to

pay future benefits; the plan sponsor

invests plan assets to increase plan

funds. Defined benefit plan assets may

be invested in part in employer securities, but all of the investment activities

are subject to strict fiduciary standards.

Among the limits imposed on the investment of defined benefit plan assets

is a restriction that no more than 10

percent of such assets may be invested

in employer assets, such as employer

stock.5 As was the case for defined

contribution plans, the ECI captures

plan costs regardless of how plan assets are invested.

Excluded plans. Excluded plans. Some types of stockrelated plans are not currently included

in the ECI because they are not taxqualified defined contribution plans.

Stock-option plans grant employees the

right to purchase stock at a fixed price

some time in the future. Stock options

come in a variety of forms (see box).

Also excluded from the ECI are stock

purchase plans, which provide employees the opportunity to purchase company stock at a discount. The Bureau’s

continuing research into these plans is

discussed at the conclusion of this article.

Stocks and benefits

The National Compensation Survey

also measures the percent of workers

who receive a range of benefits, including several types of defined contribution plans and other equity-related

plans. (See table 3.) In 1997, nearly

half (47 percent) of full-time workers in

private industry participated in a defined contribution plan. Most prevalent were savings and thrift plans, with

31 percent of full-time workers participating. As noted earlier, such plans

require an employee contribution, typically on a pretax basis under the provisions of Internal Revenue Code section 401(k). Employers then match

some or all of the employee contributions. The combined employee and employer funds are placed in an individual

account for the employee, and can be

invested in a variety of ways.

Of the workers participating in savings and thrift plans,6 87 percent could

choose how their funds were invested

and 65 percent could choose how the

employer’s matching funds were invested. The employee usually was

given four or five investment choices.

About half of those who could invest

their own contributions had the option

of investing in company stock. The

other choices included common stock

funds, bond funds, government securities, and guaranteed investment contracts. Typically, plan participants who

were allowed to choose their own investments could divide those investments in any manner. About half of

them could make changes to the investment mix at any time; the remainder were

restricted to making changes at certain

times of the year. (See table 4.)

Employees were less likely to have

investment choices for employer matching contributions. If workers did not

have a choice, the employer contributions typically were invested in employer stock; if workers had a choice,

company stock was available less often as an option. Other options for investment of employer matching contributions were similar to the options for

employee contributions, such as common stock funds and guaranteed investment contracts.

There are some legal limits on the

use of employer equity for defined contribution plan investment. For defined

contribution plans that do not allow

employees to invest their own contributions—these involve only a small

percent of plan participants—there is

a 10 percent limit on investment in employer securities, as required by the

Taypayer Relief Act of 1997. However,

this restriction does not apply if all of

the assets in the account do not exceed 10 percent of the combined assets of all employer-sponsored pension

plans. Thus, if the plan does not repreTABLE 3. Percent of full-time employees participating in selected retirement programs, by size of

establishment, private industry, 1996-97

All retirement plans ....................................... 62 46 79

Defined benefit pension .......................... 32 15 50

Defined contribution ................................ 47 38 57

Savings and thrift .............................. 31 23 39

Deferred profit sharing ...................... 13 12 13

Employee stock ownership .............. 3 1 5

Money purchase pension ................. 6 4 8

Simplified employee pension ............. 1 1 (3)

Benefit Total

Small

establishments,

19961

Medium and large

establishments,

19972

1

 Small private establishments are those employing

fewer than 100 workers. 2

 Medium and large private establishments are those

employing 100 workers or more.

3

 Less than 0.5 percent.

NOTE: The sum of items may not equal the totals

because some employees participate in more than one

type of plan.
 Compensation and Working Conditions Fall 2000 5

Putting Stock in Benefits: How Prevalent Is It?

TABLE 4. Percent of full-time employees participating in savings and thrift plans,

by details of investment provisions, medium and large private establishments,

1997

Permitted to choose investments ................. 87 65

Number of investment choices:

Two or three ............................................. 13 10

Four .......................................................... 21 14

Five .......................................................... 14 10

Six ............................................................ 8 5

Seven ....................................................... 8 6

Eight ......................................................... 7 5

Nine or more ............................................ 10 8

Not determinable ...................................... 6 6

Method of allocating investment choices:

Any multiple .............................................. 42 34

Specified multiples ................................... 37 23

Other or not determinable ....................... 9 8

Frequency of change of investments:

At any time ............................................... 47 36

Specified times ......................................... 32 22

Other or not determinable ....................... 8 7

sent more than 10 percent of total pension assets, there is no restriction on

investment in employer stock.7

If a plan allows the employee a

choice of investments, the law requires

the plan’s sponsor to “provide a participant or beneficiary an opportunity

to choose from a broad range of investment alternatives.” According to the

U.S. Department of Labor regulations

derived from this law, a plan is in compliance with the “broad range” clause

if the participant has a reasonable opportunity to:

• materially affect the potential return

• choose from at least three investment alternatives

• diversify the investment8

An example of the risk associated

with investing defined contribution

plan assets in employer stock came to

the public’s attention in 1996, when the

Color Tile Company filed for bankruptcy. The company’s 401(k) plan was

invested largely in company stock,

which lost much of its value when the

company had financial trouble. In such

cases, risk of investment performance

is borne by the employees.9 As noted

by the U.S. Department of Labor advisory committee on pension plans,

“Gains and losses are borne by participants regardless of whether the participants have a choice in the investment of their holdings.”10

NCS data on savings and thrift plan

investment options reveal an increase

in the percent of plan participants who

can direct the investment of employer

matching funds, and a decrease in the

availability of employer stock as an investment option. While the ability to

choose investments of employee contributions remained widespread, the

percent of participants who could

choose the investment vehicles for

employer contributions rose from 48

percent in 1985 to 65 percent in 1997.

The availability of employer stock as

an investment option for both employee and employer funds declined

throughout the same period. (See table

5.)

Less common plans. Less common plans. Other types of

defined contribution plans are less

prevalent and are often more restrictive regarding investment choices. In

1997, only 13 percent of full-time employees in larger private establishments

participated in deferred profit sharing

plans; in these plans, employer profits

typically are shared with employees

without regard to employee contribution (although the employee may be

allowed to make a voluntary contribution). About two-thirds of workers

covered by this type of plans were

given a choice of investments, which

included employer stock.

Money purchase pension plans. Money purchase pension plans. Participants in these plans totaled 8 percent of full-time employees in larger

private establishments. In this type of

plan, the employer contributes a fixed

percent of employee earnings (such as

2 percent or 3 percent), which is placed

in an individual employee account.

Often employees do not have the option of contributing their own funds to

these accounts. Typically, employers

make the investment decisions, although if that is the case, the plan

would be subject to the investment restrictions of the Taxpayer Relief Act,

as noted above.

Employee Stock Ownership Plans

(ESOP). (ESOP). Participants in ESOPs totaled

4 percent of full-time employees in large

private establishments. These plans

are designed for investment in employer stock, although specific diversification rules apply to older workers.

Provision Employee

contributions

Employer

contributions

1985 1989 1993 1997

TABLE 5. Percent of full-time employees participating in savings and thrift plans,

by ability to choose investments, medium and large private establishments,

selected years, 1985-97

Employee contributions:

Investment choice ............................ 90 90 86 87

Choice of company stock ................ 70 60 48 42

Employer contributions:

Investment choice ............................ 48 53 58 65

Choice of company stock ................ 61 50 38 25

Provision
6 Compensation and Working Conditions Fall 2000

Definitions of Benefit Plans that Provide or Invest in Stock

Defined contribution. Defined contribution. A general category of plan that is qualified by the Internal

Revenue Service. These plans are characterized by individual accounts, with the

contribution typically determined by some formula. The resulting benefit to the

employee is based on the contribution and the earnings on that contribution. In the

National Compensation Survey, such plans are classified as one of the following

types: Savings and thrift, money purchase pension, deferred profit sharing, employee stock ownership, stock bonus, or simplified employee pension.

Savings and thrift plans. Savings and thrift plans. An employee chooses to contribute an amount, typically

a percent of earnings. Employee contributions are often pretax, under provisions of

section 401(k) of the Internal Revenue Code. The employer matches some or all of

the employee contribution.

Money purchase pension. Money purchase pension. An employer contributes an amount based on a stated

formula, typically a percent of earnings. Employee contributions are not required,

but voluntary contributions may be allowed. At retirement, the value of the

employee’s account may be paid in a lump sum or used to purchase an annuity.

Deferred profit sharing. Deferred profit sharing. A portion of employer profits is designated to be placed in

the plan. Those profits are then allocated to employees based on a predetermined

formula, often based on earnings. Employee contributions are not required, but

voluntary contributions may be allowed.

Employee stock ownership plans (ESOPs). The employer pays a designated amount

to a fund that is primarily invested in company stock. There are periodic distributions from this fund to individual accounts, often based on a formula. These plans

may be related to money borrowed to purchase a company.

Stock bonus plans. The employer pays into a trust that invests in securities, including those of the company. Proceeds are distributed to each employee’s account, in

the form of company stock.

Simplified employee pensions (SEPs). Simplified employee pensions (SEPs). The employer invests funds in an account at

a financial institution in the name of each employee. The employee can control the

investment of the funds, much like an individual retirement account. The employee

may be allowed to make voluntary contributions to the account. Access to the

account follows the rules for individual retirement accounts, imposing tax penalties

for receipt of funds prior to retirement age.

Stock purchase plans. Stock purchase plans. Employees can purchase shares of company stock at belowmarket price. Employees receive the stock immediately. The employer does not set

up an account, nor does the employer control the stock.

Stock option plans. Stock option plans. The employer grants the employee the right to purchase shares

of company stock at a given price over a given time period. A Non-Qualified Stock

Option is taxable as wages when exercised by the employee; an Incentive Stock

Option is not taxable to the employee or deductible by the employer either when

granted or exercised. A taxable event occurs when the stock acquired under the

option is sold, exchanged, or transferred by bequest or inheritance. Stock Appreciation Rights provide employees with the gain between the grant price and the market

price of an option, without requiring employees to purchase the stock.

Defined benefit pension. Defined benefit pension. The employer guarantees a periodic benefit at retirement,

typically based on salary and years of service. Employers contribute sufficient

funds into the plan to pay future benefits.

For example, participants aged 55 with

at least 10 years of service are allowed

to diversify the investments of 25 percent of the value of their ESOP account.11

BLS data from 1993 indicated that

stock options were offered to fewer

than 1 percent of full-time workers in

larger establishments. The same survey also indicated that 2 percent of fulltime workers were offered a plan allowing them to purchase employer stock

at a discount (stock purchase plan).

Over the 1996-97 period, 32 percent

of full-time workers in private industry

participated in defined benefit plans.

As noted, these plans specify the formula for computing retirement benefits,

such as 1.5 percent of final-year earnings times years of service. The investment of defined benefit plan assets

typically is the responsibility of the

plan sponsor, subject to restrictions on

investments in employer assets.

Ongoing research

Because of the heightened interest in

stock options, brought on in part by

rises in the stock market, the tight labor market, and the increased use of

variable pay,12 BLS is conducting a

number of tests regarding the treatment

of stock options in its measures of

compensation. The first was a feasibility test of 100 employers selected because they offered stock options. The

test was intended to gauge the design

and content of the survey questionnaire and to determine if a mail survey

was appropriate for collecting data on

stock options. The results indicated

that such data typically are available,

and that there are different types of

stock option plans and different criteria for granting stock options. Also,

the test provided information about

where details on stock options could

be found within a company (typically,

they are available from the finance or

accounting department). This information will be useful in further testing of

this topic.13

The second test was a survey of a

statistically valid national sample of

about 2,000 establishments, the results

of which were published in October
 Compensation and Working Conditions Fall 2000 7

Putting Stock in Benefits: How Prevalent Is It?

2000. Its purpose was to determine the

incidence of stock options and related

plans, and to identify the groups of

workers to whom these plans are offered. Current data on the availability

of stock options will help BLS to determine the potential impact of these plans

on the National Compensation Survey.

This test also collected limited information on other equity-related compensation. Test results may be found on

the Internet at http://stats.bls.gov/ http://stats.bls.gov/

comhome.htm.

The existing procedures for determining employer costs for compensation may be difficult to apply to stock

options. As noted above, the ECI typically determines the cost of a benefit

by capturing the amount of money the

employer paid for that benefit during a

given period. For example, the cost of

a defined benefit pension plan is the

amount the employer is required to contribute to meet future benefit obligations, plus any related administrative

costs. This cost may fluctuate over

time, depending on investment returns

and other factors. It may, however, be

more difficult to make a similar determination of the cost to the employer at

the time a stock option is offered to

employees. Furthermore, the future

price of the stock and the point at which

the employee may exercise the option

are unknown. BLS is examining these

issues, in consultation with experts in

compensation and financial accounting. The Financial Accounting Standards Board, for example, has issued

standards for incorporating the cost of

stock options into employer financial

statements.

After a method for calculating the

cost of a stock option is determined,

BLS must ascertain that such data will

be available from employers and that

the data can be updated periodically.

The results of ongoing tests and research will be reported regularly in this

periodical.

1

 Detailed data and descriptions of the

National Compensation Survey may be found

in the following sources: “Employment Cost

Index—December 1999,” USDL 00-27 (Bureau of Labor Statistics, January 2000); Employee Benefits in Medium and Large Private Establishments, 1997, Bulletin 2517 (Bureau of Labor Statistics, September 1999);

“Employer Cost for Employee Compensation—March 2000,” USDL 00-186 (Bureau

of Labor Statistics, June 2000); and National

Compensation Survey Occupational Wages

in the United States, Bulletin 2519 (Bureau

of Labor Statistics, September 1999). All of

these items are available on the BLS Internet

site at http://stats.bls.gov/comhome.htm. 2

 See, for example, Justin Fox, “The Next

Best Thing to Free Money,” Fortune, July 7,

1997, pp. 52-62. 3

 See, for example, David Lebow and others, “Recent Trends in Compensation Practices,” (Washington, Board of Governors of

the Federal Reserve System, July 15, 1999). 4

 The Pension Benefit Guaranty Corporation is a Federal government agency charged

with overseeing the financial solvency of

defined benefit plans. 5

 See U.S. Department of Labor, Advisory Council on Employee Welfare and Pension Benefits Plans, Report of the Working

Group on Employer Assets in ERISA Employer-Sponsored Plans, Nov. 13, 1997, p.

7, on the Internet at http://www.dol.gov/

pwba/public/adcoun/acemer.htm, visited

April 5, 2000. 6

 Detailed provisions of savings and

thrift plans are based on data for full-time

workers in medium and large private establishments (those with 100 workers or

more).

7

 See Report of the Working Group on

Employer Assets in ERISA Employer-Sponsored Plans, p. 7. 8

 See U.S. Code of Federal Regulations,

29 CFR 2550.404c-1. 9

 See Report of the Working Group on

Employer Assets in ERISA Employer-Sponsored Plans, p. 2. 10 Ibid, p. 3. 11 See Internal Revenue Code section

401(a)28. 12 Variable pay is a general term that

refers to a variety of forms of compensation based on a worker’s performance, such

as bonuses and commissions. 13 Beth Levin Crimmel and Jeffrey L.

Schildkraut, “National Compensation Survey Collects Test Data on Stock Options,”

Compensation and Working Conditions,

winter 1999, pp. 17-20.