Employee Stock Purchase Plans (ESPPs) are an excellent way to maximize employee compensation at a modest cost, but the benefits go well beyond remuneration. A well-structured ESPP also engages employees by helping to create an ownership culture. Employees will do what is best for shareholders because they are shareholders. Considerable benefits also exist for the issuing companies, which can better compete in tight labor markets, attract and retain high-quality talent, and even improve productivity and profits.
An ESPP allows employees to purchase shares of the company’s common stock at a discount, usually through after-tax payroll deductions. Typical plans offer a 10 percent purchase price discount, meaning that the moment employees purchase their shares, they are netting an immediate gain. Plans that include a lookback provision allow employees to purchase shares at the offering-date price or the purchase-date price, whichever is lower, yielding even higher gains. In cases where the purchase date stock price is lower than the offering date price, the employee is insulated from the decline by having the ability to purchase shares at the lower discounted price. Purchase discounts and lookback features are just two of the many options that employers can build into ESPPs to ensure that they are a valuable employee incentive.
ESPPs incentivize employees to work harder in the company’s best interests. By handing over a portion of their salary to an ESPP, employees have a higher stake in the company’s performance, and are willing to go above and beyond to ensure its share price appreciation. It has been proven that employees that participate in ESPPs work longer hours, are absent less frequently, and express greater job satisfaction.
When employees are more engaged due to an ownership culture, top talent begins to think and act as business owners. And why not? They actually are! When employees are taking advantage of a successful ESPP, it does not take them long to realize that each dollar they invest multiplies their wealth. This knowledge cultivates ownership, which in turn improves corporate performance.
The issuing company benefits by enhanced productivity, as well as lower turnover and greater efficiencies. There are, however, a number of harder financial benefits to be had. Regular payroll deductions provide a steady cash flow to the company. ESPPs also cost less than other equity compensation, and can substitute for more expensive benefits. Additionally, when companies offer discounted ESPP purchases, the company can take advantage of substantial tax deductions. According to the National Association of Stock Plan Professionals (NASPP), 52 percent of U.S. companies offer an ESPP. That figure might seem high, but given the benefits reaped by employees and employers alike, it should be higher.
ESPPs are a cost-effective tool for cultivating an ownership mindset among employees at all levels of an organization and can prove a powerful tool for hiring, retention, and productivity. Those organizations that have not yet considered developing one should do so, and those that have experienced lackluster results from an existing program should seek to restructure and revitalize it to its full potential.