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Don’t discount a match: Thoughts on matching share ESPPs
The employee stock purchase plan (ESPP) is not new to the roster of frequently offered benefits. But one particular type of plan, the non-qualified ESPP that utilizes a matching share design rather than a discount design, is getting a lot of new looks lately. What might be driving growing interest in matching share ESPPs, and why might you consider one for your stock compensation program?
- Thinking differently about ESPPs
- The non-qualified ESPP, explained
- Sound like a match?
- Get in touch
- Join the conversation
Thinking differently about ESPPs
It is widely known that an employee stock purchase plan (ESPP) can be a valuable component of a company’s benefits offering. Usually offered as an all-employee purchase plan, a stock or share purchase plan affords employees the opportunity to purchase shares in their employer company by way of payroll deductions, at a discount to market value. The most common design in the United States is a qualified stock purchase plan, also known as a 423 plan, due to the tax benefits that it provides for employees.
What is perhaps less widely known, though, is that more and more companies are receptive to the idea of offering a non-qualified ESPP plan that operates under a matching shares design instead of a discount. This growing interest stems from the flexibility that a non-qualified ESPP plan offers in terms of avoiding contribution and share purchase limits, and evidence that plan participants often do not meet the stock-holding periods necessary for preferential tax treatment.
The non-qualified ESPP, explained
The concept of a share matching plan is straightforward: Employees buy shares under the ESPP and the company offers a matching number of shares at no cost to the employee. Survey data indicate that the most common matching ratio is one matching share for every two or three shares purchased by the employee. The matching shares can be subject to some conditions such as continued employment or a requirement to hold the purchased shares for a fixed period.
What is the appeal of non-qualified ESPPs that use a share matching plan in lieu of a discount? We might find the answer in the Attract + Retain + Motivate compensation equation. With companies using equity compensation as a way to attract, retain, and motivate talent, a matching shares program can be a compelling incentive vehicle. Let’s look closer at the Attract + Retain + Motivate equation and how it applies to a matching shares approach.
Sound like a match?
Given the ability to structure an ESPP with a longer-term horizon and ultimately drive higher levels of attraction, retention, and motivation, you might want to consider discussing a matching shares program with your corporate tax service provider as part of your company’s ESPP design discussions.
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