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GPS: ESPP (Employee Stock Purchase Plans)

2nd Edition

$12.00 for NCEO members; $12.00 for nonmembers

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Recently there has been a renewed interest in employee stock purchase plans (ESPPs). Whether Section 423 or nonqualified plans, ESPPs are never excessive, always in-the-money, and expense-efficient. While ESPPs can be an effective way to share ownership widely, their broad nature, coupled with sometimes infrequent purchases and tricky Section 423 requirements, presents administrative challenges and risks for stock plan professionals. This publication, produced by the Certified Equity Professional Institute (CEPI) at Santa Clara University and distributed by the NCEO, is part of the CEPI's GPS (Guidance, Procedures, Systems) series. It gives stock plan professionals much-needed guidance about processes and controls for managing ESPPs. Offering very specific and practical guidance and reading almost like a primer on selecting and managing ESPPs, this publication addresses regulatory and administrative issues specific to ESPPs. It includes many practical examples and illustrations, as well as a comprehensive section on financial reporting to help assess the financial cost of various design features.

A new GPS book will replace this in 2018; CEPI students will be assigned the revised edition, not the current one.

Publication Details

Format: Perfect-bound book, 73 pages
Dimensions: 8.5 x 11 inches
Edition: 2nd (January 2015)
Status: In stock


1. Introduction
2. Strategic Issues
3. Plan Design
4. General Administration
5. Plan Enrollment
6. Contributions to the Plan
7. The Purchase
8. Tax Issues
9. Legal
10. Employee Communication
11. Financial Reporting


From "Strategic Issues"

2.1. Overview.
2.1.1. ESPPs are frequently the only form of equity compensation offered to a broad base of employees. To be an effective benefit for the employee and the company, the plan must balance the company's objectives, the employees' benefit, administrative costs and challenges, as well as the financial statement impact. Expectations regarding participation rates plus the company's growth plans should also factor into the decision-making. Simplified plans are generally easier and less costly to administer. Automation will streamline administration, minimize errors, and reduce costs. Although the design of ESPPs may have significant variation, commercially available software will be of limited use in automating highly-customized plans, and administrative costs will be significantly higher for these plans. This section discusses the considerations when making strategic and tactical decisions.
2.2. Selecting the Appropriate Plan.
2.2.1. An ESPP must be designed to meet the company's objectives. The company may want to increase employee motivation by providing a qualified plan that provides a 15% discount with a look-back feature and a 24-month offering period with interim purchases. Qualified plans are used frequently to increase the tax effectiveness of the employee benefit. The company may encourage employee loyalty by offering a nonqualified plan with matching shares that vest one year after the purchase date of the offering. For companies in which obtaining shareholder approval is challenging, the plan may be designed with no look-back feature to manage share usage and make the plan more acceptable to shareholders. The company may strive to enhance the employees' sense of ownership by increasing personal stock holdings. In this case, the company may design a plan that includes post-purchase restrictions on selling the shares to encourage stock ownership. If the goal is to minimize the financial impact, the plan may offer a 5% discount and no look-back feature. These design features are discussed in more detail in Section 3, Plan Design.

2.2.2. Consider workforce demographics when designing a plan. The ability of new hires to participate in the next offering of the plan may be a critical advantage in attracting new employees. This feature may be important to companies expanding their workforce. A less sophisticated workforce with limited access to technology may be better served with a simplified ESPP as opposed to a plan with complicated features. A quick sale provision may increase participation in a newly designed ESPP. Companies should evaluate the interaction of stock price and average wages. Some low-wage employees may be unable to contribute a sufficient amount during an offering period to purchase a single share at the end of the period. In this case, the plan may include a feature to roll forward contributions representing a partial share to the next offering period. See paragraph 2.3.1 to 2.3.3 for a more complete discussion of the considerations when extending ESPPs to non-US employees.

2.2.3. When designing a plan, weigh the employee benefit against the company's financial and administrative costs. In most cases as the plan provides more benefit to the employee, the expense for financial reporting is higher. Exhibit 2-1 illustrates the financial statement impact of the following key design features:
  • The length of the offering period
  • Look-back or no look-back
  • Discount on the purchase of a share of stock

A plan with no look-back and a 5% discount is considered noncompensatory (i.e., has no cost) for financial reporting purposes. As expected, the financial cost increases for the other plans with a longer offering period, a look-back feature, or a larger discount. However, the cost of a plan with a look-back, a 5% discount, and a six-month offering period ($1.90) is only slightly higher than cost of a plan with no look-back, a 15% discount, and a 24-month offering period ($1.48). The financial cost of the plan design can be weighed against the employee perception of the benefits of a look-back feature as compared to a 15% discount.

2.2.4. More complex design features like resets (discussed in subsection 11.4.11), rollovers (discussed in subsection 11.4.12), and allowing for increases in contributions (discussed in subsections 11.4.13 to 11.4.15) can increase the total expense associated with an offering. These features are triggered after an offering period has started and the expense is not recorded until the event occurs. Such design features provide potential significant value to employees, but can be costly to administer, difficult for employees to understand, and may significantly increase financial reporting expense and complexity. In many cases employees may prefer a larger discount, which is more readily understood, to more complex design features, even though the financial reporting impact may be comparable.

2.2.5. It is important to consider the impact of certain design features on employee participation. A noncompensatory plan, as discussed in paragraph 11.2.1, may seem attractive from an expense standpoint, but is likely to have low participation rates, as employees may not see much value in this type of plan. At the other end of the spectrum, a plan that contains rollovers and allows for increases in contributions may have high employee participation, but the expense can be unpredictable. A plan with a 15% discount and a look-back offers predictable expense patterns.