The decision to offer an 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, ESPP's 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 own 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 and share and governance costs, which contribute to—and increase the overall cost of the plan.
Meet the true cost of an ESPP:
The compensation costs to operating 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, lookback feature, discount and length of purchase period.
In addition to compensation 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 / support to answer questions about the program to where employees are located) fall under this heading.