​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:​

Compensation Costs

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.

​​Administration Costs

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 emp​loyees 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.​

  • Plan Design

    Plan Design

    The administrative cost of a plan can vary greatly based on complexity and plan type.

  • Where are your employees located?

    Where are your employees located?

    Is your employee base domestic only or global?

  • Where does administration happen?

    Where does administration happen?

    Do you have the internal resources to administer in-house or are you partnering with an outside vendor?

  • Due Diligence

    Due Diligence

    Outside resources to help design and maintain ESPP. Very important internationally.

  • Communications

    Communications

    This can be large factor in both the overall cost of your ESPP and it's success.

Share and Governance Costs

One final area that hasn't yet been factored into the ESPP cost equation: corporate governance considerations. 

Proxy advisory firms, like ISS (Institutional Shareholder Services) and Glass Lewis, generally support ESPP programs with very few exceptions. 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 recommendation 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 and which proxy advisory firms they follow when the plan is up for vote, and avoid any surprises.

Conclu​​​​sion

An ESPP is an incredibly useful tool to recruit and retain staff, and I think we can all agree 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.

Need help with your E​​SPP pla​n design? Whether you're looking to launch a new ESPP or trying to improve the value of the one you have, we can help. Visit us at computershare.com/employeeplans​ to learn more.​​​

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