The decision to offer an employee share purchase plan (ESPP) is a lot like buying a car. Not only must you consider the upfront costs, you should also consider what features you want, what it will take to maintain and generally keep it running into the future. Like a vehicle, ESPPs have outright and annual costs, but it's not always immediately clear what those are — and compensation expenses are only part of those costs.
Determining what it will cost to own and operate your company's ESPP can be a little tricky, but it may not be as much as you think — and the tax benefits may just offset much of that cost. To calculate an ESPP's total cost, you should include expenses such as administration, share and governance costs, which contribute to and increase the overall cost of the plan.
Meet the true cost of an ESPP.
Compensation Costs
The compensation costs to operate an ESPP directly correspond to the way in which the plan is designed. Four key plan design considerations significantly drive compensation expenses. These are plan type, contribution maximums, and discounts. Each is described further below.
Plan Type
The type of plan you choose to offer will impact overall program costs.
A share purchase plan where shares are purchased on the market is a way in which employees can purchase company stock, typically with a company match. Whether the company match vests immediately or it's a delayed match, the company incurs the expense at the time the company match is made to the participant. Where the company match has a vesting schedule and the plan is structured as an Employees Profit Sharing Plan (EPSP), the company incurs the expense at the time the match is made to the participant. Where the company match has a vesting schedule and the plan is structured as an Employee Benefit Plan (EBP), the company incurs the expense (subject to certain adjustments) at the time the shares vest.
A share purchase plan where shares are sourced from treasury with a discount gives participants the opportunity to purchase company stock at a price below the current market price. The company can expense the discount if it is at least 10%. Market share purchase plans are typically more attractive than treasury share purchase plans as companies do not need shareholder approval and they typically match at a higher rate.
Contribution Maximums (share purchase plans sourcing shares from the market)
Plan sponsors can set a percentage of pay and annual dollar maximums on employee contributions. Plan sponsors can also set the company match rate and annual dollar maximums.
Generally, the higher the maximums, the greater the participation in the plan; however, higher plan participation also means higher plan costs. That said, plan participation is also a strong indicator of how much value employees are getting out of the plan because employees are buying company stock with their money. The more employees who participate, the more who believe in and understand it.
Companies should analyze the impact of moving each of the percentage and dollar maximum levers as they attempt to achieve their various plan goals. By establishing the various maximums (especially the annual dollar maximums where there are eligible high-income earning employees), a company can control their aggregate company match expense exposure.
Discounts
The discount is the largest driver of plan participation for a share purchase plan where shares are issued from treasury and the easiest design feature to communicate.
Generally, as with the contribution maximums, the greater the discount, the greater the participation in the plan; however, higher plan participation also means higher plan costs.
As noted for share purchase plans where shares are acquired on the market, plan participation is also a strong indicator of how much value employees are getting out of the plan because employees are buying company stock with their money. The more employees who participate, the more who believe in and understand it.
Administration Costs
Most plan sponsors will pay the brokerage commissions on shares acquired on the market and will have the participants be responsible for all withdrawal-related transaction fees including applicable brokerage commissions. This helps plan sponsors minimize their cost of offering the plan, while also encouraging participants to minimize the frequency of withdrawals.
If a company issues treasury shares to cover ESPP purchases, there may be no fee at all. Fee schedules from transfer agents often do not include a fee per issuance. Check the fee schedule with your own transfer agent.
In addition to compensation and transactional costs, there are other expenses, direct and indirect, associated with the plan, like the administration of it. The costs of the general topics outlined below, such as educating employees about the program, processing enrollment under the plan, providing customer service and support to answer questions about the program, and where employees are located fall under this heading.
Plan Design
The administrative cost of a plan can vary greatly based on complexity and plan type.
Due Diligence
Outside resources to help design and maintain the ESPP. Very important internationally.
Where are your employees located
Is your employee base domestic only or global.
Communications
This can be a large factor in both the overall cost of your ESPP and its success.
Where does administration happen
Do you have the internal resources to administer in-house or are you partnering with an outside vendor.
Plan Design
Generally, the more complex the plan, the higher the administration costs.
One way to simplify a plan is to mandate automatic dividend reinvestment. Where the plan sponsor is a dividend paying issuer, plan expenses can be minimized by mandating automatic dividend reinvestment. By doing so, the costs related to issuing dividend cheques can be avoided, which are significantly greater than the cost of acquiring the shares on the market or from treasury. It should be noted that automatic dividend reinvestment is consistent with the typical plan goal of increasing employee share ownership. An additional benefit of automatic dividend reinvestment is participants avoid stale-dated and lost cheque replacement issues.
Establishing Employees Profit Sharing Plans (EPSP) and Employee Benefit Plans (EBP) with company match vesting conditions will result in forfeitures of the company match under certain conditions. This is typically where the participant withdraws employee contributions before the designated period of time has lapsed, or where the participant's employment is terminated for certain, prescribed reasons. One of the plan sponsors' alternatives is to apply the forfeited shares towards its future company match obligations, simultaneously encouraging employee retention and share retention while minimizing company match expenses.
Plan sponsors should be aware that plans with vesting and forfeitures (Employees Profit Sharing Plans and Employee Benefit Plans) are typically more complex and will require a trust and trustee for which there are additional costs. However, these costs are typically quite modest compared to the value of the forfeitures.
Invariably, plan design also affects plan participation, as has been stated previously. Always balance your plan design decisions with participation objectives.
Where Are Your Employees Located
While not always an obvious issue, where employees are located plays an important role in terms of the administration costs. For example, programs with only Canadian participants generally mean less complicated plan management. Administrative updates, file changes, payroll contributions, and other such issues related to the management of a plan with Canadian participants only should be relatively simple and cost effective.
Conversely, programs with participants around the world are typically much more complicated to administer and cost more to operate. From managing multiple global payrolls and foreign currencies to ongoing due diligence, engagement of local expertise to assist with ongoing plan maintenance and compliance with regulations, operating a global program can be a challenge. But the benefit is the ability to offer a single plan for all employees, rather than trying to develop and manage a multitude of local plans.
Where Does Administration Happen
Once you finally design a plan, someone has to administer it and perform the day-to-day tasks. Some companies choose to handle the ESPP administration functions internally, and others outsource them, especially where there are trust components and/or market purchases. The cost can vary depending on how they are administered:
- Pre-existing in-house software
- Off-the-shelf application
- In-house management
- Partnering with an outside vendor to facilitate a large majority of the administration
Whether you decide to administer your program internally or use a fully outsourced service provider, there are costs for setting up the infrastructure to support the plan, e.g., the payroll department needs to have certain functionality to manage payroll deductions, and the HR/benefits department will need to incorporate plan eligibility into the HR record-keeping system.
The use of technology in ESPP administration will almost certainly contain administrative costs. With the right technology platform, employees can use online services to learn about the plan, enroll, and get help with the program. Deploying technology that allows for employee self-service will dramatically reduce the cost of enrolling an employee in benefits and could alleviate costs in hiring additional staff to manage the plan.
Due Diligence/Program Compliance
Don't underestimate the true costs of program compliance, such as consulting for overall plan design and prospectus development, securities filings and other regulatory requirements and translations where required and appropriate. These activities consume valuable employee hours every year. Initial and ongoing compliance can be expensive and is an area where many companies deeply underestimate the true costs.
Communications
Most companies don't properly budget each year for ESPP plan communications. Costs associated with posters, postcards, emails and educational materials are typically not planned and budgeted, despite the fact that it is widely known that a successful communication campaign can increase the effectiveness of the ESPP.
Further, since most companies operate their plans on a very tight budget, when planning annual costs, they generally only budget for administration fees. They don't always account for pass-through charges such as brokerage commissions or any non-scheduled events that may require communicating to the broad-based ESPP population. With a large number of eligible participants, a communication can quickly become cost-prohibitive and companies sometimes choose not to send anything, which can negatively impact the success of the ESPP.
Share and Governance Costs
One final area that hasn't yet been factored into the ESPP cost equation: corporate governance considerations.
Where shares are to be issued from treasury, formulating an ESPP proposal and/or developing an effective strategy for obtaining shareholder approval of an ESPP proposal is a relatively straightforward exercise and can generally be done without any excessive legal or registration costs.
As illustrated in the diagram below, a best practice is to complete an analysis of your top 15 shareholders anytime you are looking to put a plan vote to shareholders, including your ESPP. This will ensure that you understand how your shareholders are voting to avoid any surprises.
Complete Shareholder Analysis which includes Proxy Advisory Firm Considerations
Proxy Advisory Firm Influence
ISS 
Glass Lewis 
Both 
Other
Top 15 Shareholders
Fund Manager
4
Hedge Fund/Venture Capital 2
Investment Advisor 7
Pension Fund 0
Other 2
Conclusion
An ESPP is an incredibly useful tool to recruit and retain staff, and it is generally agreed that most employers would prefer to offer their employees the best possible selection of benefits under their plan. However, few companies are so profitable and indifferent to expenses that they can afford to disregard costs. Therefore, understanding the true costs of the ESPP upfront will allow you to design and plan an ESPP that can be the most effective and successful, and at your price point.
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Any company interested in considering the above described suggestions or answers should speak with their legal and tax advisors to determine feasibility, applicable tax implications, timing, amending their plan texts, etc. Computershare is providing general information only and nothing herein should be considered as specific advice upon which any company should rely.
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