By Barbara Baksa at the National Association of Stock Plan Professionals (NASPP)
Spoiler alert: ESPPs are both common and generous, but participation rates are disappointing. In today’s NASPP Blog entry, I discuss these and other ESPP trends from the NASPP/Deloitte Consulting 2020 Domestic Stock Plan Administration Survey.
For more on ESPP trends, don’t miss the latest episode of the NASPP’s Equity Expert podcast series, “Trends in Employee Stock Purchase Plans” in which Jenn Namazi and I chat about findings on ESPPs from the 2020 survey.
Fact 1: The Prevalence of ESPPs Has Remained Steady Over the Past Decade
Just over half of respondents to the 2020 survey offer an ESPP, consistent with the last three editions of the survey published in 2017, 2014, and 2011. ESPPs are most common among technology companies (69% of respondents in computer-related industries offer ESPPs, as do 59% of other types of technology companies) and among financial/insurance companies (63% offer an ESPP).
Fact 2: Most ESPPs Offer Generous Benefits
It is true that only 8% of qualified ESPPs have a 24-month offering period (often referred to as “Cadillac” ESPPs). But this doesn’t mean plans are stingy on benefits. I present the following evidence:
- Nearly 80% of companies that offer an ESPP have a tax-qualified plan under Section 423.
- 70% of companies that offer a qualified plan also offer a 15% discount, the maximum discount permitted under the tax code.
- Over 60% of companies that offer a qualified plan have a lookback.
- Nearly 75% of qualified ESPPs have a three or six month offering period.
Sure, a 15% discount and lookback over a three or six month period is no “Cadillac,” but I don’t know any other investment that offers an almost guaranteed 17.6% return or more over a three or six month period. Employees sure aren’t making that on their savings accounts right now.
Fact 3: Most Companies Allow Employees to Purchase Only Whole Shares
Only 35% of companies allow employees to purchase fractional shares. This is the first time we’ve asked about this practice in the history of the survey, so I’m not able to speculate about which direction this statistic is trending. It will be interesting to keep an eye on in future surveys.
25 years ago, when I first entered the field of equity compensation, the idea of purchasing a fractional share was unheard of (even though, even then, most shares were not certificated). But now, many brokers have developed processes that enable employees to hold fractional shares in their accounts and sell them at their discretion. With stock splits out of favor and some companies experiencing stock prices in the hundreds (or thousands) of dollars, the fractional shares can sometimes be quite valuable.
Fact 4: Participation Rates Are Disappointing ☹
Given the fantastic benefit that most ESPPs offer, you’d expect participation rates to also be fantastic. Alas, 65% of companies that offer qualified ESPPs report that less than half (half!) of their employees participate in their ESPP. Only 19% of companies that offer a qualified plan experience participation in excess of 70% of their employees.
Participation rates in nonqualified plans, which tend to be less generous (only 30% offer a 15% discount and only 35% offer a lookback), are even more dismal. Nearly 90% of companies with nonqualified ESPPs report that less than half of their employees participate and only 5% report participation in excess of 70% of their employees.
We Pause Now for Me to Get Out My Soapbox
I’m often asked how companies can increase ESPP participation. In my opinion, there are two ingredients to a high ESPP participation rate. First, the plan must be designed to encourage participation and must offer an economic benefit that is sufficient to mitigate the risk of investing in a single stock.
It is important to remember that ESPPs are a broad-based plan and that many employees who participate in the plan probably live paycheck-to-paycheck at least occasionally. According to Careerbuilder.com, nearly 80% of Americans live paycheck-to-paycheck at least some of the time. This is true for both lower and higher paid employees; 10% of Americans earning more than $100,000 annually live paycheck-to-paycheck. Concentrated investments, like a single company’s stock (especially if that company is also your employer), are risky. Most employees tend to be risk averse and inherently understand this risk.
Thus, to encourage participation, the plan must be generous enough to mitigate the investment risk of participating for your eligible employee population. I recommend at least a 10% discount and no restrictions (holding periods, prohibition on withdrawals, etc.) that significantly increase risk.
Second, you have to promote the plan to employees. You must have a robust educational program with multiple touch points that explains the plan to employees and encourages them to participate. Employees will not participate if they don’t understand the plan or, worse, don’t know about it.
These two ingredients—plan design and education—are both critical. No matter how innovative an education program is, it cannot fix poor plan design. Likewise, ESPPs aren’t baseball fields in Iowa. Just because you build it, doesn’t mean they’ll come (apologies to W.P. Kinsella). You can have the El Dorado of Cadillac ESPPs (to mix my metaphors), but employees won’t participate if you haven’t effectively communicated the benefits of participation to them.
Thanks for indulging me; back to our regularly scheduled programming.
The Myth: ESPP Shares Are Flipped
A criticism I frequently hear about ESPPs is that employees “flip the shares,” meaning that they sell the shares they acquire under the plan almost immediately after each purchase. But nothing could be further from the truth. Almost two-thirds of companies (63%) that offer qualified ESPPs report that participants hold the stock acquired under their ESPP for an average of one year or longer.
At the same time, only 14% of companies that offer a qualified ESPP impose a mandatory holding period. Thus, in most cases, employees are voluntarily holding the shares they acquire under the plan.
Have I piqued your interest in ESPP trends? Check out the latest episode of the NASPP’s Equity Expert podcast, “Trends in Employee Stock Purchase Plans.” For more trends from the NASPP/Deloitte Consulting 2020 survey, view the NASPP webcast “Top Trends: Plan Administration, ESPPs, Ownership Guidelines, and Insider Trading Compliance.”