ESOP Academy 13: Employee Share Purchase Plans
Sacrificing your salary to increase your equity stake
An ESPP, or employee stock purchase plan, is a program initiated by a company to enable its employees to buy its stock at a lower cost. This reduced price is often around 5-15% less than the stock's market value when purchased.
ESPPs function by permitting employees to set aside a specific portion of their earnings during each pay cycle, which is subsequently used to invest in the employer's stock. As the designated period concludes, the company buys shares on behalf of the employees at the discounted rate. In simpler words, instead of buying their company's stock outright, employees who take part in the program contribute to their plan via automated deductions from their paychecks.
The Employee Stock Purchase Plan operates selectively; not every employee is eligible. Employers evaluate a group of employees, picking those who have shown strong and consistent performance, with a likelihood of continued dedication to the company. They decide the numbers, considering exercise prices, qualified employees, and the allotment of options per individual.
Once the calculations are finalized, the company usually waits for the stock to reach a 52-week high. Then, details about the discounted options are shared. Employees then buy stocks at this reduced price. When employees decide to invest, the company starts deducting the necessary funds from their monthly salaries. This deduction happens from the grant date until the allotment date. Once the required amount is deducted, employees start to own these allotted shares.
Employees who own more than 5% of the company’s stock are not eligible to participate in ESPP. On the other hand, those with less than specific years of employment – 1 or 2 years, depending on the company- are not eligible for participation. Notably, ESPP is a benefit scheme and there is no compulsion that employees to participate.
Employee stock purchase plans (ESPPs) allow employees to buy shares of their company's stock at a discounted price, typically 5-15%. Employees contribute money from their paychecks to the plan, and the company then purchases the shares for the employees at a discounted price.