You Know What Your Company Needs? An ESPP Hero!
his is the third in a four-part series on ESPP as a form of equity compensation in a bear market. The first in the series, “Is Your ESPP Bear Prepared?” talks about the need to review your plan and available shares to ensure you will not run out of shares mid-purchase. The second article, “The Danger of Your ESPPs $25,000 Limit in a Volatile Market,” encourages communications to employees explaining why they may not be able to purchase as many shares as they can afford.
Often, when a company’s stock price drops, the morale of employees with equity also drops—after all, no one likes to lose money. However, there are some employees that may not be as unhappy when the stock drops. Who, you may ask, are these employees? Employees that participate in the company's ESPP! However, the happiness of these employees depends on how the ESPP is written. Unless the company’s stock price is in a long-term decline, employees participating in the ESPP will always make money when the ESPP has a discount based on the lower of the grant price and purchase price.
So, how do you turn your ESPP into a Superhero?
1. Follow these steps to determine if your plan has enough shares to complete the next one or two purchases. Running out of shares mid-purchase would definitely send the wrong message.
2. Second, when you communicate the advantages of the lower stock price, also communicate the $25,000 rule. Run the $25,000 rule statements, if your stock platform has them, and send them to employees that will hit the limit, so they know they will be getting a refund.
3. Communicate, communicate, communicate. Your employees will get the most from your plan and push the ESPP to superhero status if they truly understand its benefits. Explain the holding period and tax benefit status for 423 plans. This is important for potential long-term value creation. Communication is still advantageous for employees if they want to immediately sell shares the next market day.
Emily Cervino from Fidelity Stock Plans says it perfectly, “Even in a volatile market, an ESPP can be a good deal. Most ESPPs offer a discount from the current price of company stock—so even during a market decline, the price you pay is less than the fair market value on the date of purchase. It’s like buying your shares on sale. The most common discount is 15%, which translates to a return on investment of 17.6% on the date of purchase. Most plans allow employees to sell the shares right away, so the choice is up to the employee. Employees can sell the shares as soon as they become available, or they may choose to hold the shares if they see a down market as a good time to buy because of the potential growth when the market recovers.”
An example: if the company has a six-month purchase period and the individual buys $1,000 worth of stock at a 15% discount (purchase price of $850), sells immediately to lock in the 17.64% return, and then reinvests the same $850 to purchase $1,000 worth of stock. When they sell again, the individual has an annual return on investment of 35.29%. It might be even greater if there’s a look back.
Now ask yourself, other than the free money in a 401K match, where can anyone get a 35%+ return—nearly guaranteed?
A thorough, multi-channel communication plan reaches the largest possible audience. Here are some suggestions.
Get senior management involved: The CEO can get the ball rolling by promoting the ESPP at an all-hands meeting.
Make it visual: hang up posters for open enrollment.
Deliver in-person and web-based training. Deliver training in the employees’ time zones.
Offer to answer questions in private. Don’t provide tax advice (unless you’re licensed) but answer all ESPP-related questions and recommend tax advisor consultations where relevant.
FutureSense can help you with the due diligence required to verify that enough shares are available and can help you design a communications program that will help shift employee focus from the reduced value of options and RSUs to the increased value of ESPP.
About FutureSense
FutureSense is a management consulting firm that provides integrated solutions to build and sustain human capital capacity. The firm can work with you by offering support and guidance to manage your workforce. To learn more about FutureSense, please visit FutureSense.com.