Employee Stock Purchase Plans

2000, reprinted with changes 2001. 184 pp. (6" x 9"), softcover. $25 for NCEO members; $35 for nonmembers.

Employee stock purchase plans (ESPPs) have become one of the main vehicles of employee stock ownership in the U.S. among public companies and those about to go public. (ESPPs are little used in private companies except for executive stock purchase arrangements.) However, there has been little information in print on how ESPPs work, what the accounting, tax, and other technical issues are, what companies are doing with their plans, and how best to communicate an ESPP to employees. This book is being published to remedy that situation and provide guidance to companies and their advisors. The introduction reviews the basics of ESPPs, while the following chapters cover the technical and practical issues that arise. Sample plan documents are included (not on disk, only as appendices to chapter 1).

Note: The accounting treatment in this book is now out of date. We will be releasing a new edition (hopefully by the end of 2007), but in the meantime, for an up-to-date discussion of accounting for ESPPs, see chapter 9 in Selected Issues in Equity Compensation.

Introduction
Designing and Implementing an Employee Stock Purchase Plan
Administering an Employee Stock Purchase Plan
Accounting for Employee Stock Purchase Plans
Getting the Most Out of Your ESPP
Recent Research and Case Studies

Excerpts

From the Introduction

All of these trends have led to an increase in the number of companies interested in providing employees with some way to acquire equity, including ESPPs. There are other, more specific, reasons, however, why more companies are becoming interested in ESPPs. First, ESPPs require that employees use their own cash to purchase shares. This means that employees are taking a direct financial risk by purchasing stock. Many companies believe this is essential for making ownership really meaningful for employees. Another reason why ESPPs are attractive for companies is their favorable accounting treatment. Traditionally, companies have not been required to recognize a compensation expense for qualified ESPPs. With most ESPPs, therefore, companies are establishing a way for employees to purchase shares that does not show up on their financial statements. While these are the primary reasons why ESPPs have grown in popularity, there are other reasons, discussed below.

From Chapter 1, "Designing and Implementing an Employee Stock Purchase Plan"

ESPPs typically permit participants to purchase shares at the end of an "offering period," which typically runs from 3 to 27 months. Most plans have offering periods of either 6 months or some multiple thereof (e.g., 12 months or 24 months).

Plans with offering periods of more than six months typically include interim "purchase periods." For example, if the offering period is 24 months, employees might be allowed to purchase shares at the end of each of the four 6-month purchase periods within the 24-month offering period. In this situation, the purchase price in any one purchase period is usually based on the fair market value on the first day of the offering period or the last day of the particular purchase period, whichever is lower. Plans with offering periods longer than 6 months are more difficult to administer, both because of the interim purchase periods and because of the fact that in most plans of this kind there are overlapping offering periods (e.g., a new 24-month offering commencing every 6 months).

From Chapter 2, "Administering an Employee Stock Purchase Plan"

There are three methods of issuing shares purchased through an ESPP. Certificates for the purchased shares can be issued and registered in participant names, the purchased shares can be deposited into participants' brokerage accounts, or the participants can arrange to have the shares automatically sold after the purchase occurs (sometimes referred to as a "same-day sale"). There is no requirement that all three of these issuance methods be offered to participants.

If participants do not want to automatically sell the shares they have purchased, there are several benefits to depositing the purchased shares into participants' brokerage accounts instead of issuing certificates registered in the participants' names. Issuing certificates registered in the participants' names causes one certificate to be issued to each participant. Each certificate is delivered separately to each participant, and depending on the delivery service used, there can be either delays or expense associated with this process. Participants assume liability for lost or stolen certificates, and there are additional expenses and delays associated with replacing certificates. Shares deposited in brokerage accounts are registered in the name of the brokerage firm and held by the firm, reducing the participants' liability and the risk that the certificate will be damaged or misplaced. When participants eventually sell their shares, the sale is more efficiently executed if the shares are already deposited in their brokerage accounts.

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