Company Stock Plans Are a Valued Benefit, but Risks Should Be Understood

A tool to engage employees and improve financial confidence, but just part of a diversified portfolio

By Stephen Miller, CEBS Sep 22, 2016
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A growing number of workers at public companies say that participating in an employee stock purchase plan (ESPP) helps them to feel financially secure and provides a cushion to deal with major expenses.

For some, it's an unparalleled perk: According to research findings released in September by Fidelity Investments, 16 percent of employees say company stock is their most important employer-provided benefit, up from 10 percent in 2014.

An ESPP lets employees purchase company shares through automatic after-tax payroll deferrals, usually at a discount of up to 15 percent, according to Fidelity. These shares are subject to taxes on the capital gains when sold—whereas assets purchased in a traditional 401(k)-style retirement plan are taxed at usually higher income-tax rates when withdrawn during retirement.

An ESPP that's broadly available to employees throughout the company can give lower-level workers some of the benefits enjoyed by senior leaders through their executive compensation arrangements, which typically include grants of company shares or options.

Fidelity polled around 2,100 ESPP participants earlier this year. Additional findings suggest that stock plans can help employers attract and retain top talent:

  • Almost two-thirds of employees (63 percent) said that participating in their company stock plan gives them a sense of ownership of the company, and 53 percent said it makes them feel more loyal to their employer.

  • Nearly half of employees (49 percent) said that a company stock plan is an important factor when considering a new job.

"Company stock plans can be a tool to engage employees and improve their overall financial confidence," said Kevin Barry, executive vice president for Fidelity stock plan services. "These plans can also motivate employees, as over half of respondents indicated participation in their company stock plan increases company loyalty and inspires them to work harder," he added. "Employers need to be more competitive to attract and retain the best and brightest, and a company stock plan can be a key ingredient in helping employers win in a competitive labor market."

An Alternative to Loan-Taking

Employees are using company stock to address major expenses and avoid 401(k) and home equity loans, the survey showed, as the more liquid nature of savings in a company stock plan means employees can tap these assets to tackle major expenses.

Fifty-eight percent of ESPP participants said they would pay for a major expense by selling company stock instead of borrowing from their 401(k) or taking a loan against their primary residence. While there may be tax implications to selling company stock, "it can be more cost-efficient in the long run than tapping your retirement account or borrowing against your home," Barry said.

Understanding the Risks

The advantages for employees of holding their employer's stock should be balanced against the risks, however, since stock in a single company is much more volatile than holding a diversified basket of equities in a broad-based fund. In a worst-case scenario involving corporate insolvency, ESPP participants could lose their jobs just as their company stock holdings plunge in value.

"When Enron filed for bankruptcy in 1999, more than $1 billion in employee retirement savings evaporated into thin air. More recently, Lehman Brothers employees shared a similar fate," according to a Fidelity article from June on stock plan mistakes to avoid.

The survey, however, indicates that employees are not depending on company stock to fund their retirement:

  • While 40 percent indicated that assets from an ESPP will play a role in funding their retirement, only 7 percent said that they expect those assets to be a primary source of retirement savings.

  • 42 percent of employees indicated that assets from company stock will be more of a "cushion" alongside other savings vehicles.

"It's easy to become overly concentrated in your employer's stock," said Carl Stegman, senior vice president of Fidelity stock plan services. He advised educating employees purchasing company stock to "take a step back, consider how these benefits fit into your long-term financial objectives, such as college savings, retirement or a vacation home, and develop a plan to diversify accordingly."

Related SHRM Articles:

Do Stock Options Work as an Employee Incentive? HR Magazine, March 2015

Ensure the Strategic Use of Stock-Based Pay, SHRM Online Compensation, May 2012

Related Resources:

ESPPs 101: Key Dates And Terms, myStockOptions.com

Stock Plan Education: Where Employees Need The Most Help, myStockOptions.com


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