​Employee stock purchase plans (ESPPs) are a great way to incentivize employees and encourage accountability and employee ownership. An effective ESPP delivers similar benefits as other types of equity compensation, but often at a lower cost. An ESPP offers employees the ability to become a stakeholder in the company while also acting as an incentive for them to enhance their work performance, which can contribute to the company's overall success.

When setting up an ESPP it is important to identify the objectives your company is trying to meet. Here are ten things you should consider when planning an ESPP for your company.

1. Should you have a qualified or nonqualified plan?
A qualified plan offers certain tax advantages to participants. In brief, if a participants holds shares purchased for one year after the offering period start date and two years after the purchase date, then gains above and beyond any discount on the original stock purchase price are taxed at the lower long term capital gains tax rate instead of ordinary income tax rates.

However, to be eligible, the plan's design must meet the requirements of Section 423 of the Internal Revenue Code. A non-qualified plan has no restrictions in terms of design, but it also offers no tax benefit. The major differences between a qualified plan and a nonqualified plan are:

​​​Qualified Plan​​​Non-Qualified Plan
​Offers discounts up to 15 percent from the stocks fair market value price​​There are no caps for discounts
No company match allowed​
​Company match is allowed
​The plan must be available to all employees, with few exceptions​No non-discrimination requirements allowing for the plan to limit employee participation or provide different benefits for different employee groups

2. How will you determine the share price discount?
Qualified plans only allow for up to a 15 percent discount, where as there is no cap on a discount for a Nonqualified plan. Multiple surveys, including the recent CEPI/NASPP/NCEO ESPP survey, show a strong preference for the 15 percent discount among companies, especially for qualified plans.[1] While there is no quantitative evidence, it is likely this discount correlates with higher participation and greater satisfaction with the plan, as it translates into an immediate, measurable benefit to participants. It also positions the company as a "competitive" employer and helps with attracting talent.

3. How will you determine the lookback period?
A lookback period offers your employees additional benefits by applying the discount to the lesser price of either the first day of the offering period or the purchase date. Even though plans with a discount of five percent or less from the fair market value and no look back will avoid compensation expenses (see top consideration #8), research shows the lookback feature is also strongly preferred by companies, with 60 percent reporting a lookback feature on the recent CEPI/NASPP/NCEO ESPP survey.

4. Will your company offer any kind of match either in addition to or in lieu of a discount?

If you are looking to offer any sort of match in addition to or in lieu of a discount, you need to offer a nonqualified plan. Nonqualified plans allow companies to provide matching contributions in stock or cash. This feature is not available in qualified plans. This is not a popular feature. Only 4 percent of companies offer some kind of match.[2]

5. How will you determine the offering period?
Some experts say that the longer an offering period is the harder it is to administer. This is because the plan can be more expensive and more dilutive. Other experts claim that shorter offering periods are harder to administer since they need enrollment to always be open, and purchases have to occur more regularly. Research shows[3] that 6 months is the industry average with 50% of companies using a holding period of 6 months. Perhaps this is due to the "Goldilocks effect", long periods have certain detriments, short periods have certain detriments, but 6 months appears to be just right. 

6. How will you determine the holding period?
You may want to restrict when employees are able to sell or transfer their shares after the purchase. For example, if you offer a qualified plan and want to maximize the tax benefits to your employees, you could implement a two-year holding period from the date of the grant and a one-year holding period from the purchase date. However, holding periods are not a popular feature. Nearly 80 percent of companies do not include a holding period.[4] It is likely that holding periods reduce participation, since they restrict the employee's ability to choose when and how to dispose their shares.


7. Which employees will be eligible to participate?
For qualified plans, all employees must be eligible and allowed to participate, though there are certain categories however that may be excluded (such as part-time employees or employees who have been employed less than two years). Qualified plans must follow specific rules on who may and may not participate. For a nonqualified plan, there are no such requirements and the plan may limit employee participation or provide different benefits to different employee groups.


8. What are the accounting impacts of my plan design decisions?
The majority of ESPPs offer discounts exceeding five percent which causes the ESPP to be treated as compensatory and this requires the recognition of expense. The expense is generally fixed and involves a grant date valuation. Participation rate is the primary driver of expense since the initial charge is based on the anticipated number of shares to be purchased – a figure that is derived from the anticipated employee contributions for the period. As a result, ESPPs are often viewed favorably from an accounting perspective, since these programs arguably offer the most realistic expense of any equity vehicle. That is, the company only pays for the value actually delivered to its employees, as opposed to a moment-in-time "best guess" of what will be delivered in the future.[5]

9. Your communication campaign
Communicate, communicate, communicate. It's a proven methodology for successful and significantly higher participation rates. Clearly communicate the plans benefits and guidelines, making it relatable to your employees and their bottom line.


10. Should you even offer an ESPP?
Of course you should! Computershare conducted a global study of broad-based stock plans such as ESPPs.[6] In it we measured the difference in employee behavior among participants in the plans versus non-participants. The results were striking. Employees who participate in an ESPP: 

      • work longer hours
      • are absent less frequently
      • are less likely to quit
      • express greater job satisfaction

In other words, ESPP participants are better, more engaged, more valuable employees. Offering an employee stock purchase plan has the potential to improve the performance of your company's workforce.


Establishing an ESPP is a significant benefit to your employee's and for your company.  Industry surveys show that offering an ESPP is not declining. In fact it's increasing. Though outside the scope of this writing, always consider your global population, and the countries you could be offering the ESPP in since there are varying and complex laws/regulations to ensure being compliant in plan design and communications.


Computershare administers employee stock purchase plans for hundreds of companies all around the world. To learn more about our services, visit us at computershare.com/employeeplans. Ready to launch your own ESPP? Contact us at busdev@computershare.com or 888 404 6333 to schedule a complimentary demonstration of our solution.

[1] CEPI/NASPP/NCEO ESPP Survey (2016)

[2] CEPI/NASPP/NCEO ESPP Survey (2016)

[3] CEPI/NASPP/NCEO ESPP Survey (2016)

[4] CEPI/NASPP/NCEO ESPP Survey (2016)

[5] Building a Road Map to a Global Employee Stock Purchase Plan, ISP Advisors (2015)

[6] Computershare Share Plan Survey (2014)​