Are you thinking about getting stock in your own company at a lower price? It is a very special offer where you can buy the shares of the company at a discount. It’s done with ESPP.
This stands for Employee Stock Purchase Plan. It is a great way to invest in your workplace. In this article, I will discuss what is ESPP.
Further, I will cover its key features along with its working mechanism. So, let’s get started!
What is ESPP?
ESSP is a company benefit in that employees can buy shares of their company stock at a discounted rate. In this case, you can sign up for your paycheck, which is automatically deduction and used to buy the company stock.
Usually, employees get 15% off the market price, which is normally announced for a specific period and enrolment. The purpose of this plan is to invest in the company and potentially benefit from its growth.
How Does an ESPP Work?
Here is how it works:
Enrolment
Employees can choose the specific percentage of salary that they want to contribute to buy the company shares. Usually the contribution is typically limited by the company to 10-15% of the monthly salary.
Also Read: Benefits of Human Resource Management for Business
Payroll Deductions
The payroll deduction is an automated process. It enables companies to deduct the decided amount from the salaries automatically. However, the process will only work if employees enrol in the plan.
The company and the employee make decisions on a percentage according to their requirements in the offer time.
Stock purchase at a discount
At the end of the purchasing period, the company buys a share of its stock with employee-accumulated funds. The company normally offers a 15% discounted rate of market price.
Receiving Shares
After completion of the share purchase process, shares are deposited into employees’ accounts. Employees can decide what they can do; they can hold for future investment or sell immediately if the stock price is favourable.
Taxation
Employees hold the stocks for a specific period, which is called a holding period. The holding period is considered one year after the share purchase or two years after the offering period starts. Then, they can get tax benefits, and selling early leads to higher taxes.
Key Features of Employee Stock Purchase Plan (ESPP)
Here are some of the key features of ESPP:
1. Discounted Stock Purchase
One of the biggest features of ESPP is the 15% discount price rate for employees. This discounted price provides a significant financial incentive for employees.
2. Payroll Deduction Contributions
Payroll contribution is another feature which is automatically deduction a specific amount for fixed time period. This is easy and more convenient to participate as the money deduction from the salary even before they have even seen it.
These accumulate offerings for specific periods which are used to buy the company stock.
3. Accumulation Period
Each company has a specific accumulation period. It is the time when you can save a certain amount of money by deducting it from your paycheck. Later on, employees can use the money to buy stocks of a reputable company.
4. Offering Period and Purchase Period
The ESPP operates within defined offering and purchase periods. The offering period is the overall time frame during which the plan is active, while the purchase period refers to the intervals within this offering period when stock purchases actually occur.
5. Contribution Limits
The contribution of employees in purchasing stock is limited both in terms of salary, a specific percentage of salary, and a maximum number of amounts that can be invested in a year.
For example, an employee can contribute 15% of their salary and $25000 of investment in stock per year.
6. Tax Advantages
The employees can get tax benefits if they can hold the stock specific time period. When the employee buys the stock, the tax does not apply. It only applies when you sell the stock, if you hold the stock for a time period the tax could be very low.
7. Employee Retention and Motivation
This plan gives employees the chance to take part in the company. Which makes them more connected, comfortable, and motivated. When the employees own their company stock, they care more about the company assets and success with satisfaction feelings.
Benefits of ESPP
Besides knowing what is ESPP, you also have to understand its benefits. Here are more details about it.
Benefits for employees
- An opportunity to start investing in a trusted business.
- They get the stock at a discounted price compared to the normal market.
- It is an automated process that means they usually don’t have to do anything on their own.
- They get an opportunity to become one of the shareholders of the company they work at.
- There is a low risk of losing money since the investing amount is limited by the company.
- It can help them enjoy some tax advantages.
Benefits for the company
- It encourages employees to take a proper part in the company.
- If a business need to align their employee goals with the company’s goals, then this approach is the best.
- This provides benefits to employees which helps in increasing the employee retention rate.
- Businesses and organizations also improve their brand’s image in the market by implementing an ESPP.
The Final Note
Knowing what is ESPP is important if you work in a company that offers this program. It is a great way for employees to invest in their company by buying stock at a discount.
With contributions automatically deducted from paychecks, it’s simple to participate in it. Over time, this can help employees build wealth and share in the company’s success.
There are some key features of this program that we have discussed above in detail. Besides that, we have also discussed its potential benefits for both employees and the business.
FAQs
Is participating in ESPP mandatory?
No. Participation in this program isn’t mandatory.
Is this program beneficial?
Absolutely, yes. The program can be beneficial if your company is successful. You also have to deal carefully with the purchased stocks to benefit from them.
Does every company have this program?
No. This program isn’t implemented in every company.
