Many companies – including Great-West Life, Starbucks and WestJet – offer employee share purchase plans to employees with the expectation of employee retention and entrepreneurial thinking. You may be asking yourself: “What are employee share purchase plans? And do they create the desired results for employers?”
What is an ESPP? A compensation plan typically designed to provide employees with a means of purchasing company shares, as well as an incentive for purchasing those shares.
How does it work? Many companies will offer some sort of financial incentive to purchase shares; two of the most common incentives are contribution matching and discounts.
Contribution matching is where an employer will fund a portion of the employee’s contribution. For example, with every two shares an employee buys, the company will buy one share for that employee. Discounts are where the company allows the employee to buy shares at a portion of the actual share price. There are tax stipulations for these plans.
There are two main ways in which a company encourages ESPP contributions. Firstly, regular payroll deductions, which make it easy for employees to schedule contributions in increments that are affordable, and scheduled contribution dates throughout the year, which allow employees to purchase a certain amount of shares at regular intervals, i.e., quarterly or annually.
The plans usually require employees to hold the purchased shares for a minimum period of time, such as one year (referred to as vesting). Requiring a minimum share-holding period encourages retention and ensures employees are not unfairly trading their shares.
What are the advantages?
Among the many advantages of offering ESPPs to employees are an alignment of the interests of shareholders and employees, and the organizational pride it instils in employees as they will behave more like owners.
Employees who are shareholders may also feel more commitment and loyalty to their employer, which will likely reduce turnover. And, if employees understand the value of the plan as a long-term investment, it might also reduce turnover.
Another benefit is that the investment is not subject to the transaction or management fees usually charged, as most administrative fees are paid by the employer.
Exchange Income Corporation is a publicly traded Winnipeg-based company that specializes in the acquisition of diversified companies with a long history of profitability. Michael Swistun, the firm’s director of acquisitions, has experienced positive results by offering an ESPP to employees.
In a recent interview, he said: “The ESPP is a great opportunity for employees who previously worked for private companies. After the acquisition of a private company, employees now have the opportunity to literally ‘take ownership’ in their future and the company’s future. For company owners who are selling, selling to a company like EIC that has an ESPP provides an opportunity to reward his/her employees by allowing them an advantaged way to participate in the future profitability of the company.”
Swistun also said he has noticed more employee engagement and entrepreneurial thinking because employees are owners in the company.
What are the disadvantages?
Despite the numerous advantages of ESPPs, employers must also be aware of some disadvantages:
- Professional fees associated with the legal, administrative and tax issues to set up a plan;
- Human resources dedicated to the administration of the plan;
- The cost of the employer’s contribution;
- Ensuring the plan is compliant with security and tax laws; and
- If share price decreases, it can turn into a negative company morale issue.
Companies offering ESPPs to employees have seen the positive effects on attraction and retention of talent. They have also experienced increased employee engagement. Overall, if the plan is set up well from the start, the positive results of an ESPP creates “ownership thinking” among employees, which has a financial benefit for shareholders, the employer and the employee.