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10.5 Employee stock purchase plans (ESPPs)
Publication date: 30 Nov 2022
us Stock-based compensation guide
Under ASC 718, ESPPs generally result in compensation cost. A company may wish to continue operating its ESPP as currently designed, regardless of the compensation cost, to provide its employees with the maximum benefit. Because the compensation cost associated with an ESPP (including the discount and fair value related to the look-back provision) are incurred only for employees who voluntarily participate, the overall compensation cost of an ESPP may be lower than initially expected. This is in contrast to broad-based stock option grants that result in cost for all recipients, regardless of whether those recipients view the options positively. However, a company that wants to reduce its ESPP compensation cost should consider the following alternatives:
- Making the ESPP's discount comply with ASC 718's safe-harbor discount of 5% and eliminating the look-back provision (results in no charge).
- Keeping the discount at historical levels and eliminating the look-back provision (results in a reduced charge).
- Eliminating the discount and keeping the look-back provision (results in a reduced charge).
- Eliminating multiple-period ESPP plans or those with a reset provision for the look-back price (results in a reduced charge).
- Some companies are swapping the company-stock-purchase-option in their 401(k) plans and replacing it with an ESPP. This initiative reduces the company's fiduciary risk related to the 401(k), while still offering employees with an option to invest in company stock (thus mitigating any negative perceptions associated with the company-stock purchase removal from the 401(k)). It also provides an additional corporate tax deduction opportunity for dividends paid on stock held in the plan.
See further discussion of the accounting for ESPP’s in SC 5.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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