We have always been a big fan of employee stock purchase plans and have an extensive section about ESPPs on myStockOptions.com. A new survey by Fidelity, summarized in a press release, reveals that over half of the surveyed companies (51%) plan to modify their ESPPs in the next few years, and that 31% will make their plans more attractive for participants by, for example, increasing the purchase-price discount or adding a lookback provision.
This is a cheering development after some of the trends the NASPP observed in its 2011 stock plan survey. The results showed that, among the surveyed ESPP companies, the percentage with a 15% discount on the purchase price fell from 87% in 2004 to 71% in 2011, while the percentage with lookbacks dropped from 82% in 2004 to 62% in 2011. (For more survey data on recent ESPP trends, see an FAQ on myStockOptions.com.)
A company's ESPP is available to all of its employees, a refreshing contrast with the recent corporate trend of narrowing the population that receives stock options and restricted stock. It is good to see how companies view their ESPPs, as reflected in Fidelity's survey:
- 50% of the surveyed companies consider an ESPP to be part of the company's benefits package, as opposed to a form of compensation.
- 72% consider ESPPs to be as valuable as pensions and dental benefits, and more valuable than company-provided life insurance.
- 28% believe their employees value their ESPP more than other company benefits.
While it is understandable that many employees find ESPPs an alluring way to immediately sell stock for a quick profit (i.e. flipping), an advisor quoted by The Wall Street Journal in an article discussing the Fidelity survey recommends that employees contribute enough to their 401(k) plans to receive any available company match before they consider participating in an ESPP. Other advisors caution ESPP participants to remember the need to diversify investments beyond their own company's stock, and they also encourage employees to fully understand the tax treatment of ESPP participation.
Can ESPP Participation Predict Stock-Price Trends?
In a research paper published on Social Science Research Network (Do Non-Executive Employees Have Information? Evidence From Employee Stock Purchase Plans), professors Ilona Babenko of Arizona State University and Rik Sen of Hong Kong University of Science and Technology examine whether ESPP participation can predict the future direction of a company's stock price. While most academic research on stock trades focuses on what senior executives are doing, this may be one of the first papers that analyzes stock-trading by rank-and-file employees. The researchers found that stock prices of companies in the top half of aggregate ESPP purchases outperform those in the bottom half by up to 8% during the year after purchases. "Since ESPP purchases reflect the decisions of thousands of employees...they can provide a reliable signal of future performance," the authors claim. They also found that an increase in participation by lower-level employees can be associated with a higher probability of good news ahead for the company, such as a takeover, while a decrease in participation may signal hard times ahead, such as an earnings restatement.