Employee tenure length and the changes that the labor market is witnessing has a substantial impact on employee stock ownership plans. This is because most plans are designed to retain employees over a certain time period. If you have an ESPP and you’re thinking of changing your job, what do you need to know?
Read Your Plan rules
When an employee stock plan is being designed, plan administrators tend to have unrivalled flexibility in terms of how they operate their plan according to their own goals and objectives.
This flexibility can benefit employers and employees equally, but each set of plan rules tends to be bespoke to each individual company.
These plan rules should fully outline the terms and conditions associated with equity awards, when they are available and how an employee activates or purchases their stocks. As such, it’s important to read and understand them fully, because they are tailored to the plan that you find yourself enrolled within.
Recurring topics that exist for leavers that should be covered by your plan rules; for instance, if you’re granted a three-year stock purchase option over a three-year vest, it’s possible that you’re forgoing the most advantageous vest if you leave two years into a three-year option window.
The type of ESPP that you’re a member of may also have a significant impact on what happens when you leave. A Qualified ESPP v Non-Qualified ESPP will be structured differently. Click here to read about those differences.
Your Stock plan administrator or HR department will have access to these rules.
The U.S. Department of Labor reports that the median number of years that employees have been with their current employer is 4.2 years.
However, when you look more closely, trends amongst different demographics emerge. Generally, median employee tenure was higher among older workers than younger ones. The same figures show that the median tenure of workers aged 55 to 64 was 10.1 years, but how workers aged 25 to 34 it was 2.8 years.
More importantly, a larger proportion of older workers than younger workers had 10 years or more of tenure. For example, 57 per cent of workers ages 60 to 64 were employed for at least 10 years with their current employer in January 2018, compared with 12 per cent of those ages 30 to 34.
There are ‘good leavers’ and ‘bad leavers’ though. An example of a good leaver is through things like death, disability, retirement, reduction in force and redundancy. Examples of bad leavers include resignation or for the cause.
Are you a Good or Bad Leaver?
Most plan rules have specific conditions regarding the status of good and bad leavers.
Whilst most of these bad leaver conditions are designed in such a way to limit awards for employees who engage in substantial misconduct, it is possible that by deciding to leave your company and, therefore, your plan, you may be categorized as a bad leaver.
If the plan rules allow you a period of grace, you’re leaving on good terms, or due to reasons outside of your control, then it’s important to seek clarity on what happens to your stock options. Some plans will allow you to exercise vests for a period of up to six months after you’ve left, so it’s possible that you’ll remain eligible to purchase stocks for an upcoming vest.
However, it’s also possible that your stock plan administrator has an inbuilt incentive for you to stay with your company. That incentive is called a clawback, and it might be built into all the awards that you have exercised to date. A standard clawback design, which will allow your company to buy back stocks that you’ve already purchased or have yet to exercise.
Think in the long term
If you have a qualified ESPP, and it’s a central part of your retirement planning it’s vitally important to think in the medium to long term. If your options are in the money, i.e. the option price is below the listed price of that stock, then how much money are you potentially forgoing by leaving your job now versus six months from now?
Finally, the most important point is that when you’re weighing up your future employment options make sure that you fully understand the potential return of your ESPP and the potential loss that may arise if you leave without fully understanding your plan rules.
To read more about ESPPs and how we can work with you, please click here.
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