Employee Stock Purchase Plan (ESPP) Defintion

An Employee Stock Purchase Plan (ESPP) is a voluntary benefit offered by some companies to employees. Under the plan, employees can set aside a portion of their salary, usually through regular payroll deductions, to purchase shares of their employer's company stock at a predetermined price. The purchase price is often at a discount, which can range from 5% to 15% off the market price, making it an attractive investment opportunity for employees.

Employee Stock Purchase Plan (ESPP) Strategies

• Education and Communication

Provide clear and comprehensive information about the ESPP to employees. Offer workshops or online resources to help them understand how the plan works, the potential benefits, and the risks involved.

• Enrollment Periods

Establish specific enrollment periods during which employees can opt into the ESPP. Communicate enrollment deadlines to ensure maximum participation.

• Discount Percentage

Determine an appropriate discount percentage for the purchase price, taking into consideration the company's financial health and market conditions. A higher discount can incentivize more employees to participate.

• Look-Back Provision

Consider implementing a ""look-back"" provision that allows employees to purchase stock at the lower of the beginning or ending market price during the offering period, further enhancing potential savings.

• Holding Periods

Set holding periods to encourage employees to hold onto the purchased shares for a certain duration, fostering a long-term investment perspective.

Employee Stock Purchase Plan (ESPP) Examples

• Discounted Purchase

If an employee participates in the ESPP and the market price of the company's stock is $100 per share, but the ESPP offers a 15% discount, the employee can purchase the shares at $85 per share.

• Look-Back Provision

Let's assume the market price at the beginning of the ESPP offering period was $90 per share, but it increased to $110 at the end. With a look-back provision, the employee could purchase the shares at the lower price of $90, resulting in an immediate gain of $20 per share.

• Payroll Deductions

An employee decides to contribute 5% of their salary to the ESPP through payroll deductions, and their annual salary is $50,000. Over the offering period, they contribute $2,500 towards purchasing company stock.