What's an ESPP and Why Should You Be Investing in Yours at Work?

“Yay! Let’s analyze my work benefits!” – Said no one. Ever.

Most employees gloss over the minutia of their compensation package. They tend to evaluate cash compensation and health insurance most, then maybe the 401(k) plan and items like stock compensation if they receive it. Almost everything else gets pushed off to be evaluated another day. Let’s be honest, another day rarely comes and if it does it’s likely much later in time than it should have been. Today I’m here to tell you that if you work at a public company, it’s time to get off your tail, invest five minutes and learn about Employee Stock Purchase Programs (ESPP), it might be one of the best investments you make.

The name of these programs tell you a lot about what they truly are, programs provided by an employer for employees of all levels to purchase stock in the employer. While not every publicly traded company has an ESPP plan, most do and that’s because they want to encourage employee stock ownership to further align the goals of the employee with the company and its investors. The more employees with “skin in the game”, the more incentivized they are to be productive, efficient and motivated.
In order to entice employees into investing in an ESPP plan, many but certainly not all offer some truly fantastic benefits for investing through the plan. Because every plan is different it is critical that you first start by reaching out to your boss or HR department for copies of your plan document and features. These documents will outlay all the pertinent features of your plan to aide in your decision making.

The first big benefit of these plans is that they typically allow employees to purchase stock in the employer with no fees or commissions. This is wonderful by eliminating the high commissions or annual account fees that many brokerages charge, which allows more employees to have equal access to the plan and makes investing a reality for more people who may otherwise have not.

The second great benefit is that ESPP plans are very flexible in the amount you invest and allow you to auto-deduct from your paycheck each pay period to contribute to the plan. Typically, an ESPP plan will collect your contributions for six or twelve months and then at the end of the collection period purchase as much stock as possible with the amount you have contributed to the plan. Again, this allows more employees access to invest in the plan by spreading the “cost” of investing over a larger period of time and not forcing employees to come up with funds for investment suddenly.

The third and no doubt biggest benefit of ESPP plans are the potential for massive discounts to the current stock price. Some, but unfortunately not all, ESPP plans offer employees a discount on the purchase price of stock when purchased through an ESPP plan. Some employers calculate these discounts differently than others so it is important to understand how any potential discount is calculated but if there is one it is a HUGE advantage versus any other investor on the street. Imagine, a five, ten or fifteen percent discount when you buy your employer stock, that’s massive! Over time, this could result in a huge benefit to your family and one that your employer wants to provide to you!

In full and fair disclosure, we know that not all stock plans are created equal and investing in stock is inherently risky so please be sure you evaluate your employer plan and seek council of an advisor who is experienced in working with these plans. There may be holding requirements, specific tax concerns and you might even already own plenty of your employer stock.

If there is one thing you walk away from this article knowing, it’s that ESPP plans have the potential to be truly amazing work benefits and being informed of your plan is well worth the time you invest. We have seen too many folks miss out on wonderful benefits by waiting for “another day” to come. Today is the day, so learn about yours now.
Be sure to follow me here on Investopedia for more executive wealth and investing content. For my next article, I will be discussing emotional investing and how to invest more like an institution for a better decision making process.

Tim Golas - Spurstone, Architects of Executive Wealth