Employee Stock Purchase Plans (ESPP)
Did you know you have choices of what kind of plan to offer?
There is so much information and so many things to consider; Qualified ESPP 423 Plans or Non-Qualified ESPP Plans. What are the pros and cons of either of them? How can I roll this out to our employees?
To be an effective benefit for the employee and the company, the plan must balance the company’s objectives, the employees’ benefit, any administrative challenges, and the financial statement impact. Simplified plans are generally easier and less costly to administer. Automation will streamline administration, minimize errors, and reduce costs. Although the design of ESPPs may have specific variations, you will want to find the right commercially available software that is able to administer the plan. You will want to consider how customized the plan needs to be and the administration costs in managing the plan.
Selecting the Appropriate Plan
- An equity plan must be designed to meet the company’s objectives. The company may want to increase employee motivation by offering a qualified plan which provides a 15% discount with a look-back feature and a 24-month offering period with interim purchases. Qualified plans are used frequently to increase the tax effectiveness of the employee benefit. The company may encourage employee loyalty by offering a nonqualified plan with matching shares that vest one year after the purchase date of the offering. In companies where shareholder approval is challenging, the plan may be limited to a 10% discount with no look-back feature. The company may strive to enhance the employees’ sense of ownership by increasing personal stock holdings. In this case, to encourage stock ownership, the company may design a plan that includes post-purchase restrictions on selling the shares. If the goal is to minimize the financial impact, the plan may offer a 5% discount and no look-back feature.
- Consider workforce demographics when designing a plan. The ability of new hires to participate in the next offering of the plan may be a critical advantage in attracting new employees. This feature may be important to companies expanding their workforce. A less sophisticated workforce with limited access to technology may be better served with a simplified ESPP rather than a plan with complicated features. Companies should evaluate the interaction of stock price and average wages. Some low-wage employees may be unable to contribute a sufficient amount during an offering period to purchase a share at the end of the period. In this case, the plan may include a feature to roll forward contributions representing a partial share to the next offering period.
- When designing a plan, weigh the employee benefit against the company’s financial and administrative costs. In most cases as the plan provides more benefit to the employee, the expense for financial reporting is higher.
- It is important to consider the impact of certain design features on employee participation. A non-compensatory plan may seem attractive from an expense standpoint, but is likely to have low participation rates, as employees may not see much value in this type of plan. At the other end of the spectrum, a plan that contains rollovers and allows for increases in contributions may have high employee participation, but the expense can be unpredictable. A plan with a 15% discount and a look-back offers predictable expense patterns.
Do you have a question for the Global Shares team?
Please don’t hesitate to contact us!