In anticipation of new regulations that will require companies to expense employee stock purchase plans, more than a third of companies surveyed plan to change their ESPPs now, according to human resources outsourcing and consulting firm Hewitt Associates.
Among 143 U.S. companies with median revenues of $3.2 billion surveyed, 20 percent expect to either eliminate or reduce the look-back period, 10 percent plan to reduce the discount offered (going from 15 percent to 5 percent, on average) and 10 percent intend to discontinue the plans altogether, Hewitt said.
Hewitt noted that most ESPPs currently allow participants to purchase stock at 85 percent of the lower of the stock price at the beginning or end of the purchase period (i.e., the look-back period). A typical look-back period is three or six months. These types of plans wouldn't be considered compliant under the proposed new expensing rules.
"Companies are modifying their ESPPs, not only in anticipation of the new FASB regulations, but also because they're not getting good participation, good long-term ownership or both from their current plan," said Robbi Fox, a business leader at Hewitt Associates. "It comes down to the fact that some employers aren't seeing the benefit from these plans relative to their potential costs. In order to do so, these organizations need to make some measured changes, such as reducing the look-back period or the discount offered."
While nearly all companies currently provide ESPPs for their employees, only 37 percent of executives and 30 percent of white-collar workers participate in the plans. Participation numbers drop even further for administrative employees (16 percent) and production/hourly workers (18 percent), according to the Hewitt study.
Hewitt's study also revealed that more than 40 percent of organizations track employee actions when purchasing stock through the company's ESPP. Most of these employees (60 percent) typically hold on to their stock for more than one year, 25 percent keep it for less than a year, and the remaining 15 percent sell the stock immediately.
"One criticism of ESPPs is that employees benefit from the look-back feature and then cash out upon exercise or purchase of the shares," said Fox. "Thus, for many companies, employees are not becoming long-term shareholders in the business. As a result, organizations that keep their ESPPs may decide to implement a stock-holding requirement to justify the plan costs they're incurring."
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