Benefits and Compensation

Benefits of an Employee Stock Purchase Plan

Employee stock purchase plans (ESPPs) are company-sponsored programs that allow employees to purchase company stock at discounted rates. Typically, employees agree to have a certain percentage of their paychecks withheld each pay period and placed into a fund that is used to purchase company stock at a price discounted from the current market price on pre-specified dates.

While these plans are often touted as an attractive element of a compensation and benefits package, there are a number of less obvious benefits to such programs, as well.

Increased Engagement

Encouraging employees to purchase stock in the company helps foster an ownership culture in which employees feel personally invested in the success of the organization because they literally are invested in that success.

Employees who feel like employee-owners and not just employees tend to have higher opinions of their employers. Furthermore, a personal financial investment in the organization helps encourage longer-term employee retention.

Cost Effective

A natural tension exists between employer and employee when it comes to the relative trade-off between compensation and engagement. Assuming the job role and associated responsibilities stay fixed, the more an employee is paid, the more the employer expects to see in terms of effort and engagement. Of course, employers have a fixed number of resources, and sometimes it isn’t realistic to give every employee a huge raise

ESPPs place some of the compensation burden on the employee while still creating a financial incentive. Employees may get a discount on the stock price, but they’re still required to pay something to receive the benefit.

Stronger Engagement

Additionally, as noted above, creating an ownership culture creates stronger employee engagement. Raises tend to be “lumpier” incentives that are powerful tools but not necessarily day to day over the long term, whereas employee-owners most likely will constantly be interested in improving the value of their shares. This means that dollar for dollar, ESPPs may be more cost effective than simple raises at boosting productivity and, therefore, profitability.

Employers have significant challenges in the current environment. Inflation and a tight labor supply have created upward pressure on compensation, while engagement in an extremely dynamic several years has been a consistent struggle. ESPPs help address both of these challenges by creating a financial incentive that, by its very nature, encourages greater engagement.

Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.

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