ESPPs are a Dessert Topping and a Floor Wax of Compensation

Employee Stock Purchase Plans (ESPPs) get a bad rap although they should be lauded in wonderment. The proof is in the number of different areas that claim full, or no, responsibility for these underutilized instruments. ESPPs are much like the old Saturday Night Live “commercial” for Shimmer (“It’s a Dessert Topping AND a Floor Wax”). Unlike Shimmer, the mythical SNL product, ESPPs are actually delicious, effective and available on your compensation store shelves today. If your company does not have an ESPP, or has not optimized the current plan, you should consider reading on.

ESPPs are a compensation tool and a benefit plan. They are a communication tool and a way to build ownership. They work well when managed by payroll, human resources or a dedicated stock administrator. Depending on the intent, design, communication and company stock price, they can also serve a myriad of purposes. How many compensation programs require employees to pay the company? How many benefit programs can directly align employee focus with the goals of shareholders? How many incentive programs allow participants to directly choose their level of engagement? How many equity compensation instruments have been expressly created for broad-based use?

I recently had someone tell me that they couldn’t see the purpose of committing $75 per paycheck to company sponsored health insurance, because there was no guarantee he would use it. While this same person may also not enroll in an ESPP, showing them the specific upside to their investment does not require them to imagine something bad happening to them. In fact, an investment in a generous ESPP and its subsequent returns may actually help cover the annual cost of their insurance. I first heard of this particular communication approach from a benefit professional who also managed their company’s ESPP. I have also heard a wide range of other creative reasons to join an ESPP from professionals managing these programs from other departments.

As a compensation tool, ESPPs are counterintuitive. The argument goes like this. Dear Employee: We pay you. You pay us some back. We use that money to make the company better. Later, we buy stock with your money and some of our money (the discount). You then make money by selling your stock, or by hanging on to it. (Note: You may also lose some or all of your money.) Let’s face it, it’s that last piece that makes these plans truly unique and causes some pause from both the company and employees.

I won’t go into a detailed risk analysis of ESPPs at this point, but when designed correctly the risk is fairly low and the reward is high enough to be compelling. The most recent plan design survey from the National Association of Stock Plan Professionals shows that plans with a 15% discount have an average of 41% participation. There are a wide range of potential features and limits you can craft for these plans. You can build a program than meets several, or only a couple, of key specific needs.

While we are giving 3% merit increases, we are also cutting other forms of equity compensation and competing in an aggressive talent market. We should all consider the potential of ESPPs. They are a dessert topping, a floor wax, a room deodorizer and powerful plant food. There are not many tools like this at our disposal. Does your company have an ESPP?  If not, why not?

Dan Walter is a CECP and CEP and works as Managing Consultant for FutureSense. He is passionately committed to aligning pay with company strategy and culture. Dan is also a leading expert on equity compensation issues and has written several industry resources including the one-of-a-kind Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, , “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.