updated July 22, 2013
Improving economic conditions and a strengthening job market are prompting publicly traded U.S. companies to enhance their employee stock purchase plans (ESPPs), according to a report by Fidelity Investments, a benefits plan service provider.
More than half of the companies surveyed (51 percent) indicated they intend to modify their employee stock purchase plan during the next two to three years in an effort to improve their benefits package, with nearly a third (31 percent) of employers either introducing or increasing the employee discount on company stock—usually between 10 percent and 15 percent—or adding a “look back” provision to help workers buy shares in their company at a lower purchase price. A look-back provision usually compares the share price at the beginning and end of the purchase period and uses the lower number to calculate purchase price.
These intended changes are in sharp contrast to some of the downgrades many plan sponsors made to their employee stock purchase plans over the past few years. “During the recent recession some employers felt the need to reduce or eliminate the discount in their employee stock purchase program, just as many employers felt the need to reduce or eliminate their 401(k) match,” Kevin Barry, executive vice president for stock plan services at Fidelity Investments, told SHRM Online. “But as the economy continues to improve, companies are reinstating their discount, as they realize that an attractive employee stock purchase plan can be a significant asset in attracting and retaining the most talented employees, especially in competitive hiring markets like technology, professional services and transportation.”
In addition, employers often feel that employee stock gives their workers "skin in the game" by providing them with an equity interest in the firm, albeit a small one.
Risks and Benefits
Even so, when these plans have been offered to employees throughout the organization, participation rates have been fairly low. In a 2011 survey by the National Association of Stock Plan Professionals, 66 percent of responding companies that offer ESPPs reported an employee participation rate of 40 percent or less.
One reason: Many financial advisors suggest that it's risky for employees to invest a large amount of their savings in their company’s stock. In a worse-case scenario, such as Enron, workers could lose their jobs just as the employer's stock plummets in value.
However, in the right circumstances, ESPPs can help attract and retain professionals with in-demand skills, particularly at startups. According to a 2013 study by compensation firm Connell & Partners, 40 percent of companies that recently went through an initial public offering created an ESPP, and all of those organizations offered their employees the opportunity to purchase company stock at a 15 percent discount.
That could pay off big if the stock surges in value as the startup succeeds, or end up a losing bet if the company goes under.
Distressed companies also might rely on stock in lieu of higher pay or other benefits. For example, in July 2013 Dow Jones Business News reported that Atlanta-based First Data Corp. will replace its 401(k) matching contributions and cash bonuses with stock as part of an effort to return the credit-card processor to profitability. The changes will broaden employee stock ownership, now roughly 1 percent, to nearly every First Data employee. "Given our challenged current profitability, it is necessary at this time and will allow us to fund investment in innovation and new product development," CEO Frank Bisignano said in his memo to employees.
Bisignano explained to the Wall Street Journal, "It is important that we treat every dollar in this company as if it's our own, and the best way to do that is to treat every employee as an equity owner."
ESPPs vs. 401(k)s
Savings within an ESPP can be more accessible than savings within a 401(k), including 401(k)s that offer employer stock as an investment option, Fidelity's Barry noted. Although taxes may still apply, workers can access the assets within an ESPP without the penalties and repayment requirements incurred when they take a loan or withdrawal from their 401(k) account. And savings from an ESPP can be applied to a variety of financial needs, such as a down payment for a home, a home-improvement project, tuition payments or other expenses.
Fidelity found that the majority of company stock plan assets (57 percent) are being earmarked for eventual investment or retirement savings after participants sell them. When asked what they think are the most common ways in which employees use the proceeds from their stock plan, 69 percent of employers said retirement savings, along with college savings (42 percent), emergency savings (41 percent) and to reduce debt (33 percent).
A Note on ESPP Accounting
Under the Financial Accounting Standards Board (FASB) Accounting Standards Codification project, the employee elements of FASB Statement No. 123 (revised), Share-Based Payment, have been codified as ASC Topic 718. FASB 123(r) and ASC 718 require companies to expense equity-based employee compensation on their balance sheets.
According to a white paper from Performenstration, a pay consultancy, under ASC 718 any discount that is greater than that offered to the regular shareholders or is more than the standard cost of issuing new shares now results in an expense to the company. While a safe harbor provides non-compensatory status for a discount of no more than 5 percent of the share price on the purchase date, "the end result of the new rule requires companies to recognize an expense for nearly every effective IRC 423 ESPP."
Despite the expensing requirement, "Even the most generous [ESPPs] are less expensive for the company than most other forms of equity compensation," the white paper states. "While the rules for accounting have increased the expense associated with these plans, they have not affected the value that these plans offer to the company, employees, and, ultimately, shareholders." Moreover, "ESPPs have long offered a unique opportunity to engage employees. That opportunity should not be taken away due to accounting issues."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Reducing Liability for Company Stock in 401(k) Plans, SHRM Online Benefits, March 2013
How Much Is Too Much Employer Stock in a Qualified Plan?, SHRM Online Benefits, November 2010
New Rules Govern Employee Stock Purchase Plans and Incentive Stock Options, SHRM Online Compensation Discipline, February 2010
IRS Issues Final Employee Stock Purchase Plan Regulations, SHRM Online Compensation Discipline, December 2009
SHRM Online Benefits page
SHRM Online Retirement Plans Resource Page