ESPPs Becoming Somewhat More Restrictive

In the most comprehensive study available on employee stock purchase plans (ESPPs), the research firm Equilar has found that 21.4% of the Russell 3000 companies (the largest 3,000 public companies) with ESPPs conform to the new "safe harbor" accounting rules that allow companies that offer no look-back features on their stock and a 5% or less discount at the time of purchase to avoid recognizing any expense for the plan on their income statements. As we have noted before, it is arguably irresponsible for a company to promote such a plan to employees. Employees usually must put aside cash over six months or longer with no interest and incur a small risk that between the time they exercise and time the transaction actually clears (usually a day or two later), the stock price could fall. Among new plans introduced in the last year, 41.5% have a safe harbor provision, but only 8.1% of plans founded more a year ago and amended in the last year have this provision.

Overall, approximately 60% of the plans provided a 6-month offering period, while 15.8% had a 12-month period. Based on other surveys done in prior years, these percentages show little change over the last several years. Interestingly, amended plans were about twice as likely as new plans to increase the offering period.

The total dilution represented by ESPPs has shown some decline, with just over 40% having dilution accounting for less than 1% of all shares, while 71.6% came in less than 2%, up from 61.8% in 2005. The number of plans with over 10% dilution fell from 10% in 2005 to 3.9% in 2006. This change could be the result of plan designs that cap the amount an employee can put aside, lower participation from employees responding to the plans that follow the safe harbor rules (these plans are not likely to attract more than 10% participation), or companies putting a cap on the total shares available.

The results are similar to previous more limited surveys that suggest a minority of companies with ESPPs are either abandoning them altogether (about 5%) or abandoning them all but in form and adopting the new safe harbor rules. The majority that are keeping their plans are "tweaking" them instead of making major changes.

The study, "Employee Stock Purchase Plans," can be found in the September 2006 issue of Equilar's Executive Compensation Trends newsletter.