Are employee stock purchase plans a good idea?
Regardless of if you are an owner, CEO, or just a member of management you need to come up with ideas on how to keep your employees happy and productive, as well as making sure they want to stay employed with your company. One way to ensure that your employees are happy is to offer various employee benefits like employee stock purchase plans, or ESPP's. An employee stock purchase plan is a benefit where your employees have the opportunity to purchase stock options from your company, during a certain offering period, sometimes at a discount.
You can offer your employees a qualified employee stock purchase plan or a non-qualified employee stock purchase plan. Being that qualified plans provide preferred tax treatment for employees, and non-qualified plans don't, they are a better benefit to offer to your employees.
Employees are no longer just employees; they are part owners of the company. Employee stock purchase plans are a great way to involve your employees in the ownership of the company. By actually owning a part of the company employees have been known to be more productive, stay employed with your company for a longer period of time, and your employees are usually happier. This stuff happens because the employees are no longer just working for you or the company, they are now also working for themselves.
Your company will be more likely to succeed in a highly competitive workforce. If your employee owns a part of the company they are going to want to see that company succeed. If the company does not make money the stock price will not increase, therefore your employees might suffer a loss if they decide to sell their stock, but if the company does well stock prices will increase and they can make a profit if they sell their stock.
More money will be put back into the company. Money will be put back into the company because employees are purchasing the stock options rather than management just giving the employees stock. By purchasing the stock options, even at a discount, the employees are putting their own money back into the company, which increases the company's equity.
Employees will always have a gain on their investment. Being that the employees are purchasing the stock options at a discount when they sell their options they will be making a profit. For example if the fair market value is $20 and your employee gets to purchase stock for a 15% discount, they will only pay $17 for each option. If they turn around and immediately sell the stock they will make a $3 gain on each option, but if they hold on to the stock and the market value increases they can make an even bigger gain.
Tax breaks for the employee. Qualified employee stock purchase plans are covered under Section 423 in the IRS code, so sometimes they are referred to as 423 plans. Under section 423 of the IRS code employees are not taxed at the time of purchase, they will only have to pay taxes after they sell their stocks. If the employee keeps the stock for the required holding period a portion of their gain may be taxed as capital gains or ordinary income. With non-qualified plans the difference between the fair market value and the price the employee paid is treated like ordinary income and is taxed at the time of purchase.
Employees have a savings plan. When enacting employee stock purchase plans, employees can choose to invest a minimum of 1% and a maximum of 15% of their after-tax wages, but no more than $25,000 worth of stock options in a calendar year. And since the amount invested is set up as a deduction from the employees' payroll, they don't have to worry about setting aside the money to invest in a savings plan.
Overall employee stock purchase plans are an added benefit for any company, but qualified employee stock purchase plans are more valuable to the employee then a non-qualified employee stock purchase plan.