Did Accounting Rules Do In Hooker Furniture ESOP?

One of the largest ESOPs in a public company was that of Hooker Furniture in North Carolina. When the plan was formed in 2000, the company had about 2,000 U.S. employees, and the ESOP owned about a third of the stock. Now Hooker has shrunk to about 1,000 employees as a result of outsourcing. Its stock has performed well since 2000, however, resulting in increasing compensation costs per employee to pay off the loan. Under ESOP accounting rules in effect since 1992, companies must show a charge to compensation as shares are released to employee accounts from a leveraged ESOP based not on what the company paid for the shares but their current fair market value. That increase in reported compensation costs, in turn, makes the bottom line look worse. The result has been that most public companies with substantial ESOP holdings terminated their plans, often by simply making stock contributions to a 401(k) plan instead. In the company's press release about the termination, it said ESOP compensation costs were now too high for the company to sustain. Whether accounting rules really caused companies to rethink ESOPs or were a convenient excuse for companies that wanted to move to less costly benefit programs is open to debate, but it is clear that since 1992, ESOPs have played a much smaller role in public companies.