Employee Stock Purchase Plan, ESPP

Employee Stock Purchase Plan
Control your future and look into your company ESPP or Employee Stock Purchase Plan

Employee Stock Purchase Plan (ESPP)

We at CareerTracker just read a stat that stated that the average American household has less than $5000.00 in savings for retirement. We thought it might be a good time to help folks to think about increasing the nest egg. Today we are talking Employee Stock Purchase Plans.

The Employee Stock Purchase Plan or ESPP for short can be confusing. This is different from an Employee Stock OPTIONS plan where a company grants stock OPTIONS to an employee.

This post breaks down the mechanics of the program and WHY an employee should consider participating. We have worked in Fortune corporate companies and we have worked in tech companies. We have participated in the company ESPP plan and Stock Option plans at prior companies, and we are fans of both. Companies usually have one OR the other so as employees, we usually don’t have a choice in which plan is available.

Guest Poster @barstonel

A great friend and a guy with serious intellectual horsepower was gracious enough to write a guest post on ESPP’s. He has a similar attitude towards life and career as we do. We both believe that as individuals, we need to take control of our own destinies. We should not rely on a company to take care of our career or our finances in retirement. The company can provide career opportunity but they are not going to give it to us. Similarly, the company can provide tools so we can set ourselves up for financial success, but we need to take advantage of them.

He has a blog which we are proud to share with you here. IYou can check out his site here at https://barrettnelson.com/.  You will see very quickly, he is not your typical bean counter.

Workplace Benefits: ESPP

One of the most under-appreciated workplace benefits is the Employee Stock Purchase Program (ESPP). The ESPP can be one of the most lucrative benefits offered, but according to Fidelity, only a third of employees participate. Consider yourself lucky if your company offers an ESPP! Details of each company’s ESPP can vary, but in this post, I’ll describe the benefits of the most common type.

How it works

Employees contribute up to 15% of their salary to the ESPP (they can pull their money out anytime). After six months, the savings are used to purchase company stock. Here is where it gets interesting…the sale price is set by the company: 15% discount off of either the stock price at the beginning of the period or the stock price at the end of the period, whichever is LOWER. Employees can then keep or sell their stock.

The math

Here is an example:

  • Employee contributes $1,000 over six months. The stock price at the beginning of the period was $10, and at the end of the period, it was $11. The stock purchase price is 15% off of the lower of the two prices ($10 – 15% = $8.50). At the end of the period the employee receives 117 shares of stock ($1,000 contribution / $8.50 share price = 117 shares) worth $1,287 (117 shares * market value of $11 = $1,287). The employee can sell the shares for a 29% return.

Hey, wait! What if the stock goes down over the period?

Here is the same example with a lower stock price at the end of the period:

  • Employee contributes $1,000 over six months. The stock price at the beginning of the period was $10, and at the end of the period, it was $9. The stock purchase price is 15% off of the lower of the two prices ($9 – 15% = $7.65). At the end of the period the employee receives 130 shares of stock ($1,000 contribution / $7.65 share price = 130 shares) worth $1,170 (130 shares * market value of $9 = $1,170). The employee can sell the shares for a 17% return.

Why do so few participate?

  1. Because this is not intuitive and is optional, many don’t bother learning about this benefit.
  2. Saving is painful. Contributing to the ESPP means a lower paycheck, but participants receive their contributions plus gains back twice a year. Essentially like two extra bonuses each year.
  3. Underappreciated opportunity. There is no limit to the gains. If your company stock price doubles from $10 to $20 during this period, your contributions more than double ($1,000 contributed becomes $2,340).

Key Takeaway: If your company offers an ESPP, take part! It is part of your compensation package, so do not leave money on the table. If it is difficult to start contributing, you can start small and increase your contribution percentage over time. You will not regret it!

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