An employee stock purchase plan (ESPP) lets employees purchase company stock at a discount of up to 15 percent off of its fair market value. An ESPP isn't a retirement plan — that would be an employee stock ownership program (ESOP), in which your company contributes stock to a retirement fund. Instead, an ESPP allows employees to purchase stock and do what they want with it, whether that's selling the stock immediately or holding on to it for years. By starting an ESPP, you can:
- Reward employees without raising their salaries.
- Motivate employees by tying their total compensation to the performance of the company.
- Provide an added perk without greatly affecting your bottom line.
Learn how ESPPs workAn ESPP doesn't provide employees with a 15 percent off coupon for buying stocks. To get the discount, they must have funds deducted from their paychecks.
Learn the lawFor employees to get the full benefits of an ESPP — namely for purchases of stock by employees to be tax-free — your plan must meet the requirements of Section 423 of the Internal Revenue Code.
Find an ESPP managerWhile ESPP basics are easy to understand, the devil is in the (many) details.
Test your knowledgeBefore you pitch an ESPP plan to your employees, make sure you have the lingo down pat so that you can answer their questions.
Get employees on boardDespite the "instant profits" that employees can make on ESPPs, the sign-up rate for such programs is low. A study by Hewitt Associates, a human resources consulting firm, found that only 37 percent of executives participate in their company's ESPP, and the numbers decline with the level of employment: Only 16 percent of administrative employees participate.
Encourage employees to think long-termEmployees can sell the stocks they purchase through an ESPP immediately for quick profit, but selling quickly may not be the smartest thing they can do.
- Keep employee expectations reasonable: ESPPs aren't guaranteed to make money in the long term.
- Remind employees of the enrollment period deadlines so potential participants don't miss out.
- Teach employees that they need to hold onto the stock if they want to avoid certain taxes.
- Consider providing employees with a company-sponsored accountant come tax time to help them handle sales of stock bought under an ESPP.