Saving Mr. Edison... A New Path for General Electric Going Forward

A New Path for General Electric Going Forward

The mission facing employees at GE may not be as significant as the one facing Captain Miller and his ragtag group of infantrymen on D-Day+3 in seeking out Private Ryan, but my guess is that if the patriarch of that company was still around today, he would reverse the emphasis of his famous quote uttered many years ago when he said…

“Genius is 1% inspiration and 99% perspiration!”

GE is in desperate need of someone turning on the collective corporate light bulb. Inspiration? Here’s an idea!

A successful and profitable GE probably exists at some level below where it is right now from a revenue standpoint.  That probably means fewer employees over time which probably also means growing employee disaffection. How can this reduction-in-force be managed efficiently and effectively? One contrary idea is to get employee buy-in via the establishment of an ESOP [Employee Stock Ownership Plan].

The above might sound odd to have an equity incentive plan involving all employees of a publicly-traded company [PTC], whose common stock has been declining significantly but not if there is a plan default income provision that emanates from non-corporate funds. A plan also where there is no chance for market loss. That’s where the “inspiration” comes in. Connecting the dots with the short version…

A PTC requests a prohibited-transaction exemption to transfer employee stock options [ESOs] into a 401(k). Traveler’s tried to do this in the late ‘90s before their acquisition by Citicorp. In 2009, the SEC’s Release 34-60126 allowed ESOs to serve as collateral in brokerage accounts against the sale of listed, exchange-traded options [LETOs]. The Chicago Board of Options Exchange followed up with the administrative necessities thereafter. If done in a 401(k), income generated would be tax-deferred until distributed. So, GE sets up an ESOP in conjunction with their ESO stock plan with the ESOs transferred into their 401K with LETOs then sold or written against same in conservative income-producing transactions known as covered calls. What would this incentive plan look like?

We would have a 401K brokerage account [subaccount], synched with GE incentive plan software, e.g., Equity Edge, that would hold GE ESOs against which LETOs are written, generating and accumulating LETO premium income. This account could be held by a custodian or a trust company also possibly involving a collective investment trust that may be in play in concert with an ESOP. What are the variants then of the incentive plan?

The company, GE, may then…

• Distribute cash, ESOs or LETOs to itself or to plan participants
• Exercise ESOs or allow assignment of LETOs within the plan
• Manage the account with the needs of the plan participants uppermost while secondarily meeting corporate needs, e.g., ESOP repurchase liability funding, etc., [further discussion].

Traditional equity incentives require a rising stock price which, as is the case with GE and others, is not always the case. In the incentive world of the ESOP, which has almost always been the purview of the privately-held corporation, virtually everyone is a shareholder which also traditionally, would be difficult for a publicly-traded company, until now. What we are suggesting then is that the employee-shareholder and the corporation are much more closely aligned. 

Advantages then that would inure to the corporation and by extension to their employee-shareholders could emanate from a variety of tax and financial reporting areas. There would be a much reduced earnings per share [EPS] dilution as ESOs would be less likely to be included in the denominator for such calculations. Companies like GE have loss carry-forwards subject to valuation allowances that have become subject to greater scrutiny due to the recently passed tax legislation. GE’s ability to rely upon a new source of income, i.e., LETO premium income distributed back to the corporation, may allow them a new legitimate venue in managing, not only EPS, but also their income tax provision. 

A contemporary of Mr. Edison, Albert Einstein, might suggest at this time that you pause for a moment or two for a “thought experiment” on what I have suggested, along with requesting a copy of the 7-page *.pdf [1] that gets into these issues in greater detail. Our final genius who walked the Earth a couple of millennia before both Tom and Albert summed up the rationale for the above with the following line that has stood the test of time ever since…

“Necessity is the Mother of Invention!”                                                              -Plato

[1] “ERISA, the Courts and a New “Riskless” Equity Incentive"[Considerations for Fiduciaries, Plan Sponsors and Advisors]