If you’re seeing the headline and asking, “What is ESPP?” you’re not alone. “ESPP” stands for employee stock purchase plan or employee stock purchase program.
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Typically, an ESPP is a program that is set up and administered by the company and enables employees to buy company stock at a price lower than the stock’s market value. The purchases are made via employee payroll deductions. Deductions are taken over time, and then a purchase is made at a set point.
The specifics will vary, such as how much of a discount is offered and how the stock purchase price is determined. There are pretax and post-tax options (though usually post-tax), minimum and maximum contribution amounts, and other variables to consider.
Let’s take a look at a few pros and cons to offering an ESPP.
Pros of Offering an ESPP
- ESPPs are an easy way to let employees purchase shares and make them feel they have ownership in how well the organization does. This can help motivate them and show them they’re truly a part of the organization, making them less likely to leave.
- ESPPs can be used as a benefit or as a component of compensation. This is especially relevant when a decent discount is offered over the market purchase price, as it may give employees the opportunity to buy lower and sell higher, creating an option to cash out and essentially increase their take-home pay if all goes well.
- Employees participating in such a program may take a greater interest in ensuring the ongoing profitability of the company.
- Employers may be able to raise some funds this way by promoting the program.
- If there’s a vesting schedule, it can have a positive impact on retention, especially for major players who have a lot invested and want to stick it out.
- Helping employees save for retirement can be a way to ease financial worries, which can reduce overall stress levels.
Cons of Offering an ESPP
- This benefit can, of course, only be offered by companies that are already publicly traded. This isn’t so much a con but more of a limitation.
- Any organization offering an ESPP must ensure it’s doing so in a way that complies with relevant taxation requirements and other laws. This will require careful administration. Many employers opt to work with a provider that will handle the majority of the administrative burden.
- Employees who make less may feel they are at an even greater disadvantage because they may not have the disposable income to comfortably participate. This may impact employee morale if not well managed.
- Even with a discounted purchase price, employees could still lose money over time, as with any stock investment. This could be discouraging and could negatively impact employee morale.
- There will be tax implications for anyone participating in the program. While this is, of course, not typically a reason not to participate, some people may be reluctant to do anything that complicates their tax situation, especially if they’re unfamiliar with stock purchasing in general. There are also tax implications right from the start: Whether the employer offers a qualified or nonqualified plan will determine whether the discount on the purchase price is considered taxable, among other things.
This is just an overview of pros and cons to offering such a program. If your organization is considering offering an ESPP, there are many more considerations to look at before proceeding, such as Internal Revenue Service (IRS) rules related to how the plan is designed and how it is administered and taxed. Be sure to do full due diligence before making any plans.
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.