FIDELITY STOCK PLAN SERVICES Five Things to Know about Today s ESPPs Employee Stock Purchase Plans (ESPPs) have long been an ideal way to share ownership on a broad basis. In today s competitive labor market, ESPPs are experiencing a resurgence of popularity as companies seek to provide competitive benefits and meet employee needs. Fidelity Stock Plan Services teamed up with Radford to dig deep into 175 ESPPs to spot trends and tricks for effective plans.* We ve selected a few of our favorite points here. Contact your Fidelity or Radford representative for more detailed information.
Design trends are positive. Things are looking up from a plan design perspective. Comparing 2016 design features to those found in our 2014 study, we see a trend toward the positive. The advancement is small, but across all significant design levers, there is improvement. More companies are offering tax-qualified plans, more companies include a look back feature, more companies are providing a 15% discount, and fewer companies are restricting the sale of ESPP shares. All of these improvements make the plans more generous and more compelling to employees. Offering Type Price Type 18% 8 6 65% 61% 2014 2016 4 35% 39% 8 82% Ending price Look-back 423 Nonqualified 2014 2016 Discount Sale Restriction 6 4 2014 2016 9% 6% 7% 8% 23% 21% 9% 11% 52% 54% 8 6 4 77% 78% 11% 11% 12% 2014 2016 11% no match match 5% 1 15% None 3 or 6 months 1 year or greater
Participation is progressing. The participation trend is even rosier than design but still can get better. While the design elements showed subtle changes toward the positive, participation rates improved at an even greater rate. There is still room for improvement, with the majority of employees not participating in their ESPP. Participation Rate 3 21% 23% 25% 28% 17% 17% 1 0 2014 2016 25% Total U.S. O.U.S. Participation rate overall jumped four percentage points to 25%, but 75% of employees still don t participate.
Design matters. Even within the relatively narrow confines of Section 423, there is still a significant amount of design flexibility, and design clearly drives participation. The key plan design levers are the level of discount, the availability of a look-back, and the tax qualification. Plans offering a 15% discount and a look-back (most of which are tax-qualified), have the highest level of participation. Interestingly, nonqualified plans that offer a match, either in shares or in dollars, have strong participation. These nonqualified plans can be more aggressive in the level of discount than tax qualified plans. However, even with attractive plans offering a 15% discount and a look-back, the majority of employees are not participating in the plan. Educational campaigns have been shown to increase plan participation. Plan sponsors should consider how communication and education can be used more effectively to drive plan participation. 15% Plans with a 15% discount and a look-back have the highest participation, but discount is the largest single driver of participation. Price Type and Discount 3 1 no match Ending price Look-back 22% 12% 12% 19% 25% match 5% 1 15% 29%
Transfer restrictions make sense. About half of ESPPs have some type of transfer restriction. Transfer restrictions shouldn t be confused with sale restrictions. Sale restrictions prohibit sale of the shares for a specified period of time. Sale restrictions have a negative impact on participation. Transfer restrictions, however, don t restrict the timing of the sale, but they control the location of the sale. Employees participating in an ESPP with transfer restrictions can sell the shares whenever they like. However, they need to sell the shares from their captive broker account. Transfer restrictions are more common with Section 423 plans, where they can maximize the corporate tax deduction, by capturing 10 of the disqualifying dispositions, and minimize administrative work by eliminating the need to survey/track shares that have been transferred out. Transfer Restrictions 1% 6% 6% No transfers allowed 3 months 6 months 8 77% 7% 15% 1 year 1.5 years 6 51% 46% 49% 54% 4 14% 2 years 23% 51% None None Some restriction Total 423 Nonqualified
Sectors vary. ESPPs are used across many industries, but plan design varies by industry. Technology and biotechnology firms have a long history of strong ESPP participation. However, they don t hold the exclusive rights. Since design drives participation, firms looking to increase ESPP participation can follow the lead of technology firms and offer more value in their plans with greater discounts and a look-back. Design by Industry Cable & Telecom Energy Finance & Insurance Manufacturing Medical & Bio-Tech Professional Services Technology 43% 14% 14% 29% 27% 27% 9% 36% 3% 48% 14% 14% 21% 21% 38% 17% 17% 8% 38% 6% 19% 38% 5 13% 13% 25% 26% 1 26% 38% No discount or match 3 months; all discounts; ending price 3 months; 15% look-back 6 months; all discounts; ending price 6 months; 15% look-back Travel, Entertainment & Recreation 29% 29% 14% 14% 14% Wholesale/Retail 8% 52% 4% 8% 28%
Conclusion ESPPs are an effective way for companies to share ownership on a broad basis. Mixing and matching design features can optimize participation and mitigate expense. This list of five considerations is a great starting point. When you are ready to dig deeper into ESPP design decisions, check with your Fidelity Stock Plan Services representative for a full report on the finding of our ESPP research.
*Research by Fidelity Stock Plan Services and Radford based on 175 Fidelity ESPP clients and 3.7 million eligible participants as of June 30, 2016. Small sample sizes have been suppressed. FOR PLAN SPONSOR USE ONLY. Radford and Fidelity Investments are not affiliated. Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. The Fidelity Investments and pyramid design logo is a registered service mark of FMR LLC. Recordkeeping and administrative services are provided by Fidelity Stock Plan Services, LLC, or by your company and its service providers. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 2017 FMR LLC. All rights reserved. 811829.1.0