Besides wages and salaries, another common method for publicly-traded companies to compensate their employees is to provide them with the opportunity to purchase the company’s stock. The Employee Stock Purchase Plan (ESPP) offers a very direct method of allowing employees to participate in the overall employer’s profitability over a certain period. ESPPs allow workers to buy shares of their employers’ stock in a simple and convenient manner by using after-tax payroll deductions. They are perhaps the simplest form of stock purchase plan in use today.

Another way of describing ESPP is an Employee Stock Purchase Plan is a company-run program in which participating employees can purchase company shares at a discounted price. Employees contribute to the ESPP by deductions made from their paycheck that build up between the date the ESPP was offered and the purchase date when the company uses the accumulated funds to purchase shares in the company on behalf of the participating employees.

Who has access to ESPP?

An ESPP is a benefit that offers you the opportunity to purchase shares of your employer’s stock at a discounted price through accumulated payroll deductions.  It is only available for employees of publicly traded companies. While not all public companies offer ESPPs most of them do so.

How ESPP works?

In the upfront enrollment period of the ESPP you must decide what percentage of your salary you would like deducted to buy your company stock at a discounted price. In most plans, you may contribute up to 15% of your salary (pre-tax or after-tax depending on the company) or a maximum of $25,000 each year. Some plans have a minimum contribution on the order of 2% of your salary to participate. Unlike your 401k, your ESPP contributions are withheld from the after-tax income.

Usually, ESPPs have either a twelve or 18-months offering period that consists of two or three 6-months purchase periods. Once you enroll, your payroll contributions accrue until your employer uses the accumulated funds to purchase company shares on your behalf on the last day of each purchase period.