One of the most underappreciated workplace benefits is the Employee Stock Purchase Program (ESPP). The ESPP can be one of the most lucrative benefits offered, but only a third of employees participate according to Fidelity. 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.
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.
The average return for ESPP programs is 31.3% according to Fidelity. For reference, the average savings account return is 0.06%.
Why do so few participate?
Complicated benefit: Because this is not intuitive and optional, many don’t learn about this benefit.
Saving is painful: Contributing to the ESPP means a lower paycheck. The upside is that participants receive their contributions plus gains back twice a year. Essentially like two extra bonuses each year.
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).
Don’t leave compensation on the table!
If your company offers an ESPP, take part! It is part of your compensation package, so do not leave money on the table. You can start small and increase your contribution percentage over time. You will not regret it!