Companies Implementing ESPP Changes

November 10, 2004 ( - More than a third (35%) of companies in a recent poll say they plan to change their employee stock purchase plans (ESPP) before the expected December release of accounting rules requiring the expensing of ESPP's.

A Hewitt Associates news release said that 20% expect to either eliminate or reduce the look-back period, 10% plan to reduce the discount offered (going from 15% to 5%, on average) and 10% intend to discontinue these plans altogether. According to Hewitt, most ESPPs allow participants to purchase stock at 85% of the lower of the stock price at the beginning or end of the purchase period (i.e., the look-back period). A typical look-back period is three or six months.

The moves come ahead of the Financial Accounting Standards Board’s (FASB) plans to issue its Final Standard in December, which will require companies to expense ESPPs.

“Companies are modifying their ESPPs not only in anticipation of the new FASB regulations, but also because they’re not getting good participation, good long-term ownership or both from their current plan,” said Robbi Fox, a business leader at Hewitt Associates, in the Hewitt press release. “It comes down to the fact that some employers aren’t seeing the benefit from these plans relative to their potential costs. In order to do so, these organizations need to make some measured changes, such as reducing the look-back period or the discount offered.”

According to Hewitt’s study, nearly all companies currently provide ESPPs for their employees, but only a fraction of workers participate. In fact, only 37% of executives and a third of white-collar workers participate in these plans. Participation numbers drop even further for administrative employees (16%) and production/hourly workers (18%).

In terms of limits, 64% of organizations have a maximum annual dollar amount that can go toward purchasing stock through the company’s plan (median of $25,000), while 72% limit the amount that can be deducted directly from salary (median of 10% per year).

Hewitt’s study also reveals that more than four of 10 organizations track employee actions when purchasing stock through the company’s ESPP. Most of these employees (60%) typically hold on to their stock for more than one year, 25% keep their stock for less than one year and the remaining 15% of workers immediately sell the stock.

Hewitt surveyed 143 US companies with median revenues of $3.2 billion.