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Do ESPPs Generate Higher Levels of Participant Perceived Value?

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April 25, 2019 | Jennifer Namazi

Do ESPPs Generate Higher Levels of Participant Perceived Value?


If you’ve been reading this blog for a while, you may have noticed my affection for employee stock purchase (ESPP) plans. You may have also observed my passion for exploring all things related to the communication, education and perceived value aspects of administering equity plans. Today I’m merging two of my favorite topics to dissect whether ESPPs generate the higher levels of perceived value among stock plan participants than other award types.

First a few ESPP data points:
  • Our NASPP survey data (NASPP Deloitte 2017 Domestic Stock Plan Administration Survey) reports that just over half (52%) of responding companies have an ESPP plan. Although I’ve heard much talk in recent years about increasing popularity of these plans, there still appears to be a lot of room for growth in ESPP plan adoption.
  • Most ESPP plans that in existence today (82%) are qualified plans under Section 423 of the Internal Revenue Code.
  • Employee participation in ESPP plans for the majority of companies is below the 40% level (62% of companies reported participation rates of 40% or less).
With only half of surveyed companies using ESPPs and less than half of their employees, for the majority, participating in the ESPP, is it even remotely possible that an ESPP could trigger the highest levels of participant perceived value among the variety of equity awards used by companies?

The various forms of equity award types share common goals. Among them: attract, reward and retain employees, create a “skin in the game” mentality intended to drive performance, and align employee interests with those of shareholders. While the goals of a company’s issuance of various types of stock compensation may be similar, how those goals translate to value in the participant’s eyes may vary.

In the case of non-ESPP award types, such as restricted stock units or stock options, the employee is most often not investing their own money into the award. Most stock options, for example, are exercised in a same-day-sale transaction, where the funds needed to acquire the shares under the option are deducted from the proceeds of the sale. So although the employee is paying for the shares, in this example they are doing so with money that wasn’t already in their pocket prior to the transaction.

At first glance, one could suggest that non-ESPP instruments could be perceived as more valuable to the employee, since their out-of-pocket financial outlay and risk of personal funds, is lower. With an ESPP, the employee is usually investing money direct from their paycheck – straight out of their own pocket. This might seem to suggest there could be an increased fear factor when it comes to considering participation in the ESPP and monitoring the ups and downs of their investment. I don’t have data on employee fear levels when it comes to participating in the ESPP, but I do want to suggest that when employees are literally putting their own money into game, in the form of a conscious decision they’ve made proactively, any financial upside from that investment may trigger higher levels of satisfaction and value attribution to the plan. Yes, they are using their own hard-earned money. The key here is that they are choosing to do so, whereas with other forms of equity compensation the choice to receive the award is made for them by the company.
 
Beyond an employee’s ownership over their decision to participate in (and invest via) the ESPP plan, the design of the plan itself should not be overlooked in analyzing drivers of perceived value. Many ESPPs include features that serve to minimize the impacts of a downward slide in stock price (offering period parameters and lookbacks) and maximize the upside to the employee (purchase price at a discount from the fair market value of the stock at the time of purchase). These could the key differentiators in the perceived value a participant might assign to the ESPP versus other equity types.

A core question in employee compensation is how to deliver maximum value within each part of the compensation pie to workers. Although stock compensation can sometimes be viewed holistically as one segment of compensation, it’s worth the attempt to differentiate how value may be assigned to each type of award or stock plan. In the case of an ESPP, it’s my belief that the overall value proposition may be underestimated by some companies and perhaps too closely lumped with full value awards and stock options. In considering the value of an existing ESPP, or a planned implementation of such a plan, I’d encourage companies to take another look at how the difference in plan features and use of employee contributions may lead to higher perceived value.

I’ll be presenting on “Establishing and Administering an ESPP” (with co-presenters Joseph Catalano of Consolidated Edison, Inc. and Kenneth Puritz of Computershare) at Computershare’s ESPP Day event in Boston on May 16, 2019, and look forward to continuing the conversation on ESPPs.

-Jennifer
 
 

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