Companies can offer company stock to their employees in several ways. One—the employee stock purchase program (ESPP)—is a benefit, rather than a form of compensation. One thing it definitely is not is an employee stock ownership plan (ESOP), which seems to be trending slightly downward in popularity.
The ESPP is a benefit similar to a discounted gym membership rather than a form of compensation, explains Emily Cervino vice president of stock plan services at Fidelity. The optional program means employees can choose to participate or not, and can usually choose to do so at a range of salary percentage between 1% and 10%.
According to Cervino, companies use the plans as an attraction and retention tool, and there aren’t any lawsuits. “These are not designed to be part of a retirement plan,” she tells PLANSPONSOR. “They are used strictly in the world of publicly traded companies.” At its most basic level, the plans provide an opportunity for employees to purchase company stock using regular payroll deductions. Stock is purchased on a predetermined schedule, generally at a discount, at the end of a contribution period.
Some plans offer stock with a look back, a feature that allows employees to “look back” at the stock price, comparing it from the beginning of the contribution period to the end. If, for example, the stock price was $10 at the beginning and $12 at the end, the employee would use the lower price to purchase stock.
Sometimes, Cervino, notes, the plan has a holding period of three, six or 12 months, during which participants are required to hold onto the stock, but most plans do not contain this condition.
Plan sponsors can find an advantage in offering an ESPP because it is an opportunity to share ownership with the entire workforce, says Cervino. “Most companies limit awards to employees at the higher end of the pay scale, but this is designed to be a broad-based program.”NEXT: Employees who purchase company stock may receive unexpected extra benefits
The benefit may have other advantages, according to new research from Fidelity Investments. In addition to experiencing a sense of ownership and pride in the firm, employees who participate in an ESPP may have more confidence and control over their financial well-being.
Nearly half of employees (48%) who purchased company stock through an ESPP sold all their shares within two years, demonstrating the role company stock can play within an employee’s overall financial plan.
Despite the significant percentage of sellers, the findings showed very few people “flipped” their stock purchase: just 6% of employees who sold all their shares did so within 10 days of purchasing the shares.
Employees in ESPPs that offer a higher discount are more likely to sell sooner, Fidelity found: almost 40% of employees with a 15% discount sold all their shares within 90 days, compared with 25% of employees in plans with a 5% discount.
However, higher discounts contribute to higher employee participation rates. “Plans with a 15% discount have double the participation rates when compared to plans with a 5% discount.”
The research also found that age can impact how employees managed stock purchased through their ESPP. More than half (57%) of the employees younger than 30 sold all their shares within two years, while 58% of employees older than 60 held all their shares.
In addition to helping workers manage short-term expenses and financial needs, Fidelity found that employees who have access to an ESPP are less likely to take 401(k) loans. When faced with expenses that must be addressed quickly, cashing in shares from an ESPP may help to avoid the risks and implications associated with 401(k) loans, a move that can get in the way of reaching retirement goals and lead to reducing or stopping 401(k) contributions. Another advantage: the money does not have to be repaid if the employee changes jobs.
Offering employees a chance to purchase company stock can produce positive benefits for both workers and their employers, including improved productivity and morale, and a sense of ownership in the company, according to Kevin Barry, executive vice president of stock plan services at Fidelity. “Whether it’s covering short-term expenses, paying down debt, building an emergency fund, or complementing their 401(k), company stock plans can help improve employees’ overall financial wellness.”