These days, lots of people are talking about employee ownership, employee share plans, and what those look like during a time of economic uncertainty. You might be seeing a lot more vocabulary and jargon thrown around in everyday conversation, including terms that you might not have heard before. One of those is ESPP, or employee stock purchase plan.
Here, we want to help you understand what an ESPP is, and how it can help both employers and employees. If you’re an employer, even if you know exactly what an ESPP is, it can sometimes be hard to communicate this message to others. And if you’re an employee, this is a good chance to understand why you might start hearing this term even more often.
What is an ESPP?
An employee stock purchase plan (ESPP) is an employee ownership plan that allows participants to purchase stock in their companies at a discount. The way they do this is by making monthly contributions directly from their paychecks, building up a savings pot until the purchase date.
The participants, since they are buying stock for a discount and then selling for the normal price, can buy low and sell high. Some ESPPs have a second insurance against risk. They can offer what is known as a ‘lookback clause’ in addition to the discount. Here’s an example of a lookback clause in action:
The ESPP’s purchase date is December 31st. On that date, the share price is €10. The ESPP’s rules give participants a 15% discount, as well as a six month lookback clause. During the offering period, the price was €5. So, the participant purchases stock at a 15% discount off the price of €5, rather than the €10. And if the price during the offering period had been higher, for example €15, then the participants would purchase their stock at a 15% discount off the price of €10.
Different ESPPs can offer different benefits, but most include a discount as well as a lookback clause.
What are the other benefits of an ESPP?
From the above, whether or not your plan has a lookback or not, it is easy to see the financial benefit of an ESPP. But there’s more to an ESPP than just the financial gain. Because ESPP also brings employee ownership.
Employee ownership is a term that gets thrown around a lot in articles like this. Just in case you’re unfamiliar with the term, it means that employees own stock in the company. It doesn’t mean that employees are now running the ship – rather, that they can profit off of the company’s success, and generally have other stock ownership rights, such as voting.
When you have shares in your employing company (which you do with an ESPP), it means that your hard work for the company directly translates into a higher reward for you. The better a company does, the higher their stock price is. The higher their share price is, the more profit you make when you sell your shares. Which is good financially, but it also fosters a community spirit. Everyone in the company, no matter which department they’re in, have their interests aligned – with the company, and with each other. This in turn makes teamwork even easier.
Not only that, but knowing that every success you have in work directly impacts you and your colleagues adds purpose to even small victories. Studies show that employees participating in employee ownership plans have higher job satisfaction, and it’s easy to see why.
If you’ve been curious about all the benefits of ESPPs or employee ownership – or you want to understand how they can help your company specifically, contact us today for a free demo. Our experts will walk you through the entire process, and see which plan is best for you.