Employee stock purchase plans have gotten a bad rap over the past decade or so (think Enron, WorldCom and Bear Sterns), but a recent survey suggests the plans may be coming back into fashion.

Fifty-one percent of companies surveyed by Fidelity Investments, a provider of stock plan administration services, said they plan to modify their employee share purchase plans in the next two to three years. And 31% say they're considering either introducing or increasing the employee discount on company stock - usually between 10% and 15% - or adding a look-back provision to help employees buy shares at a lower purchase price.

"The mindset around them is clearly changing," says Kevin Barry, executive vice president of stock plan services with Fidelity Investments. He says there is a strong correlation between participation in employee share purchase plans and the discount.

Those intended changes are in contrast to some of the downgrades many plan sponsors made to their ESPPs over the last few years. According to the Fidelity study, 71% of the employers who modified their employee share purchase plan said the changes were a result of the economic downturn. Those changes included lowering or eliminating the employee discount on stock (14%), shortening the look-back period (6%) or removing the look-back provision altogether (5%).

As the economy continues to improve, employees may cautiously express renewed interest in stock purchase plans.

"The employees in any company have to feel good about the economy, wage growth, their company and the stock market," says J. Eustis Corrigan, managing director, CBIZ MHM, LLC. "All those feel-goods have to be there and present for anybody to be willing to say, 'I'm going to participate in the plan.'"

And if the Fidelity survey results are any indication, employers see value in their stock purchase plans as a key retention and engagement tool. Seventy-two percent of employers consider an ESPP to be as valuable as pensions or dental benefits and more valuable than company-provided life insurance. And more than a quarter (28%) felt their employees value the company's plan more than other company benefits.

Forty-one percent of employers surveyed, meanwhile, said they hoped enhancements to their ESPP would help their attraction and recruiting efforts. One-third indicated they hoped the improved plan would help retain valued employees, and 45% felt improvements to the employee stock purchase plan would motivate their workforce and improve morale.

Employees who take advantage of these plans "have skin in the game, because [they] bought shares ... and the employer has skin in the game in the form of dilution," says Corrigan.

 

Communication challenges

Still, the plans are not without challenges. Employees, still skittish about the economy and jobs, may struggle to save outside of their 401(k) plan and many may not understand the benefits of a stock purchase plan.

"I think a lot of employees have heard that there is a plan, but employees may feel like it's something that involves brokerage and trading. And that feels inherently risky to those whose only investment experience may be through a 401(k) that is heavily promoted, heavily sponsored within their company," says Barry.

For employers, this means communicating the benefits and potential pitfalls of the plans clearly. "If you own stock in a publicly traded company, you have to understand what that means," says Corrigan.

Other benefits include the opportunity to buy company stock at a discount and the ability to contribute to the plan through payroll deductions.

The key benefit, says Barry, revolves around the offering period, which can range from four months to one year, with the most common offering period being six months. The discount is calculated based on the stock price at the both the beginning and the end of the offering period, with the employee getting the discount off the lower of the two prices.

Moreover, the plans can be an added way to save for retirement, although Barry emphasizes that the plans should not be used as a primary retirement savings vehicle.

"This is very much in the spirit of being a complementary investment vehicle," he says. "It's not something that is supposed to be a primary focus or replace other kinds of key investment options."

Savings within a company stock plan are also more readily accessible than savings within a 401(k) plan. Although taxes may still apply, workers can access the assets within an ESPP without the penalties and/or repayment requirements incurred when they take a loan or withdrawal from their 401(k) account.

"In times of job changes or a college situation - all the unexpected things that may hit people - they can access these funds on a real-time basis without the big tax hit," says Barry.

 

Hologic increases ESPP participation

Hologic, a supplier of diagnostic products, medical imaging systems and surgical products focused on women's health, redesigned its employee share purchase plan with Fidelity in 2012. The new and improved ESPP features a 15% discount and a six-month look-back period, replacing the previous safe harbor plan that offered a 5% discount and no look-back period.

Employees at Hologic wasted little time taking advantage of the ESPP enhancements. In fact, during the six weeks after the company announced the increased employee discount and look-back, enrollment shot up from 14% to 31%.

As more employees learned about the improved plan design, participation rates continued trending up, hitting 44% at the beginning of 2013.

One of the keys to Hologic's successful rollout of its revamped ESPP was a comprehensive communications plan. Hologic first identified key milestones and the best ways to communicate the ESPP changes to employees. Using a combination of printed materials, emails, posters, webinars and seminars, it was virtually impossible for employees to escape news of the ESPP changes.

The ambitious communications campaign focused on a message of "opportunity." All elements reinforced the message that this was a chance for additional savings and an opportunity to become aligned with the long-term growth of the company.

David Peterson, director of global compensation and stock administration at Hologic, suggests that, when making changes to an existing ESPP, companies should be mindful of how any changes may affect company expenses and the ability to hit earnings-per-share targets. It's also important to consider whether the company's systems can handle the operational requirements for any changes. And, he recommends com-municating news of the changes broadly, using a variety of methods.

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