Providing employees with several stock options is amongst the best employee retention strategies for organizations in the modern world. And out of all the other options, employee stock purchase plan (ESPP) is the most effective way to keep employees happy and satisfied with the benefits offered to them by their employers. It allows employees of a company to purchase the stock of their company at a discounted price. ESPP wasn’t considered good enough to be a part of a company’s employee retention strategy a few years ago. But things have completely changed now. Organizations have come to terms with the benefits it can offer them.
Above all, it helps them retain good talent and attract the best performers from the global talent pool. By allowing employees to buy stocks, organizations are taking a step towards aligning their employees’ interests with other stakeholders. Employees who buy these stocks are encouraged to work even harder to help the company succeed and grow.
Employee stock purchase plans help employees buy stocks without having to bear the high cost usually associated with stocks. But before an organization goes ahead and creates an ESPP, they first need to understand what it is, what it should include, and what benefits it can offer them and their employees. Without considering these things, they will only be venturing into something they know very little about, resulting in the non-realization of expectations.
Many companies around the world are now using ESPP for compensating their employees. In addition to the usual salaries and wages that companies pay to their employees, they can offer them the option to buy company stock. This is a straightforward way of making employees contributors to the company’s overall growth over some time. Organizations have the option to choose between two types of ESPP plans – qualified ESPP plans and non-qualified ESPP plans.
You might also be interested to read: Preventing Employee Burnout In The Organization
Qualified ESPP plans and non-qualified ESPP plans or direct purchase plans are often referred to differ from one another in regards to their compliance with regulations. Qualified plans comply with them, while non-qualified plans don’t. In qualified plans, employees are allowed to buy company stock at discounted prices, and those discounts come with tax benefits. So, if employees purchase a stock and don’t sell for a particular period, they can bring their tax obligations further down.
A qualified plan can be taxed in two different situations. If an employee doesn’t sell the stock for a very long period, they will have to bear with taxes whenever they sell those stocks. And these taxes will come in the form of long-term capital profits. Also, if the stock price when an employee bought it was lower than the fair market price of that stock, they will be taxed whenever they sell the stock. And the taxes, in this case, will come in the form of ordinary income.
On the other hand, in a non-qualified ESPP plan, taxes are applied to the difference in the purchase price and fair market value. In other words, your employees will have to pay taxes on purchasing a non-qualified ESPP plan, no matter if they keep it or sell it. So, they will be paying more taxes if they buy non-qualified ESPP instead of qualified ESPP. And similar to qualified ESPP, employees will be taxed on the additional gains they make after selling the stock.
One of the biggest reasons more and more employers are turning towards ESPP plans is the sense of ownership that it helps instil in employees. By buying company stock, it is natural for employees to feel more motivated, invested, and committed to the company’s welfare. The feeling of ownership can drive both loyalty and productivity in employees. The benefit for the company is that they have more motivated employees who are willing to put that extra effort into the company’s growth.
ESPP plans are a great addition to the perks that organizations use to lure the best talent from across the world. These stock plans, in a way, make your employees owners of a part of the company. What it also does is help employees grow their wealth exponentially, which is not possible through traditional means. When employees have several benefits to choose from when looking for a new job, organizations can beat the competition by adding an ESPP plan to their employee benefits.
Another big reason many employers have started giving their employees an option to buy company stock is to improve employee retention rates. Retaining top employees is always a challenging task. However, when employees purchase company stock, they are more likely to stay longer with the same company. The reason is, they want to see their company succeed and make profits out of it. No wonder ESPP is fast becoming a significant inclusion in the employee retention strategy for organizations. Also, investing in an ESPP plan gives employees a better return than any other form of compensation, including bonuses and commission, amongst others.
By offering their employees the freedom to purchase company stock, organizations will create a culture and identity that is unique from others in the business. They will not only encourage ownership in employees but also project an image of an employee-centric company in the eyes of everyone looking from outside. Organizations can create a brand of their own that focuses on the welfare of their employees. And eventually, that would help a company build a good market reputation and, at the same time, increase their valuation as well.
Employee stock purchase plans are a great way to attract and retain employees. Organizations need to use all the knowledge and tools at their disposal to give their employees the best option to make the most of this great opportunity.
Reference:
- How To Build An Employee Stock Purchase Plan | Vantage Circle | 30 September, 2021
- Introduction to Employee Stock Purchase Plans – ESPP | Investopedia | MARK P. CUSSEN | April 27, 2021
You might also be interested to read:
