Implementing a new ESPP

A couple of quick stats from the recent NASPP/Deloitte Deomstic Stock Plan Design survey

• over 85% of companies with IRC 423 plans offer a discount of more than 5% (79% offer 15% discount)


• 26% of responding companies offer a non-423 plan (the true number is probably higher since, in my experience, many companies with these plans do not belong to the NASPP)


• 32% of non-423 plans offer a 15% discount


• most common purchase period is 6 months (55%)


• most common offering period is 6 months (48%)


• Only 66% of 423 plans offer the traditional "lower of the beginning and ending prices" formula. (like due t the extra FAS 123 costs for this feature)

Hi Sara,

I can't paste the link to an ESPP with a 2yr offering period (4 purchase periods 6 months apart), 15% discount based on lower of offering date or purchase date closing price. You can see it on EDGAR at the Zoran 8-K filed 8/3/2005 as exhibit 99.3.  You don't see many of these any more due to the accounting expense.  However, your employer should definitely have the accounting expense modeled as part of the information considered as it may not be very great in the scheme of things.  I know of one company that did an internal survey of its employees and found the ESPP was more valued than their stock option plan.  Because ESPP shares are frequently sold on purchase your employer should also consider how such sales might affect trading in the shares.  For that reason and to reduce the accounting expense the number of shares that each participant can purchase on a purchase date might be limited to say 500 shares.

As Dan has noted, 15% discount based on lower of and a 6-month offering period with a single purchase date is nowadays very common as it doesn't require much thought.  Eventually people may start to think about managing the accounting expense of longer offering periods by limiting the number of shares that can be purchased.

My experience with these plans reflects the statistics Dan shared with you on a previous post.  Here are the details from my previous employer:

• 15% discount


• no lookback (used to be one until FAS 123 killed it)


• 6 month purchase (used to be one year, again a lot to do with FAS 123)


• There is a one year hold on the purchased shares to foster ownership and eliminate "churning".


• Annual purchase max is $22,750 of the face value.

As an aside:  I don't have the statistics, but my sense is that the trend is for companies to scale back their programs or eliminate them altogether and very few implementing them because of the accounting expense.  Perhaps someone might be able to share some trend data on these programs.

Hello Sara: My firm is a consulting and outsourcing firm, so we see and work with several different plans. Here are a few thoughts based on our experience:

1. Safe-harbor plans do not get the type of participant rate companies are hoping for. I would say our experience is that there is about a 10% to 15% participation rate. The cost of running the plan (whether outsourced or managed internally) on a per-person basis is very high. I would ask you to ask these questions of your company: What is the purpose of creating this plan? Is it to say you have an ESPP plan? Is it to provide an equity plan that employees value and appreciate? Is it a tool to attract high-caliber employees? Then create the plan that fits that purpose. There are ways easing the accounting impact while still offering a plan with a discount and look back that is more attractive to current and potential employees.

2. Plan to do several employee education sessions, regardless of the plan features. Plan ahead and do these sessions with plenty of time for employees to think about it prior to the enrollment deadline. You should also do these on a regular basis prior to each open enrollment period.

3. Do not allow participants to change their contribution rate once the offering period begins. That will create a lot of accounting work on an on-going basis and I do not think there are softwares that can account for this yet (though I could be wrong). So this work would need to be done outside the software.

We find that a well-designed plan (from the employee's point of view) and well-educated employees make for a more successful plan, one that may be more likely to fulfill the purpose of creating the plan.