Now, more than ever, business leaders are struggling to solve wealth disparity issues among employees. With rising costs of living and real wage growth remaining stubbornly low, employers face mounting pressure to maintain margins while incentivizing employees to create value. Although some progress has been made, most employees have missed out on the compensation gains that their higher earning colleagues have enjoyed[1].
For more than 50 years, executives have had a powerful tool intended to solve this problem: employee stock purchase plans (ESPPs). After years of stock market gains, limited wage growth and rising inflation, President Lyndon Johnson launched the “war on poverty.” One of the initiative’s key legislative accomplishments was the Tax Reduction Act of 1964, which empowered employees of publicly traded companies to contribute up to $25,000 per year (approximately $190,000 in today’s dollars) to purchase company stock at a discount, usually 15%[2].
Many ESPPs also include a powerful lookback feature. A lookback applies the discount to the lesser of the starting or ending price over a specific period. This means the purchase price can be much lower than the price of the stock and the actual realized discount can far exceed 15%. The temporary gain provided by the discount alone is equivalent to nearly a 4% inflation-adjusted annual raise for an employee, made possible by simply participating[3]. In 1964, the median household income in America was approximately $6,000[4]. The $25,000 annual contribution limit sent a clear message to corporate America that ESPPs were intended to be a powerful wealth building benefit.
Yet, because of regulatory and market forces, ESPPs have been surprisingly underused. Despite the extraordinary appeal of participating in an ESPP, most employees do not. On average, 70% of eligible employees do not participate in their company’s ESPP[5]. Exclude Silicon Valley-based companies and that number rises to nearly 80%. The result? Roughly $45 billion in income is lost every year by America’s working class[6]. Given the benefits of ESPPs, why is participation so low among broad based employees?
Many employees live paycheck-to-paycheck and it’s often difficult to cover basic living expenses. Given that ESPPs typically require after-tax payroll contributions, employees with less disposable income often find it exceedingly difficult to participate.
ESPPs are often difficult to understand, especially for employees who have never participated in a plan before. Further, as budgets tighten, HR and Benefits offices are being asked to take on greater workflow and keeping up with the volume of questions from the workforce is a tremendous challenge.
Participation in ESPPs is highly correlated to income. Lower earning employees have had to sit on the sidelines while their higher wage colleagues have benefited from the growth in their company’s stock.
Cashless Participation® is an enhancement to global ESPPs that allow employees to maximize their contribution in their company’s ESPP even with limited payroll deductions. Participating employees can buy more shares than they otherwise would have been able to afford—without seeing their paychecks shrink. By owning more long-term shares for the same out of pocket cost, employees reduce their risk and gain greater potential for capital appreciation.
Companies which have adopted Cashless Participation have created a vital pathway to bridge the wealth disparity gap amongst employees.
By adding Cashless Participation to a company’s ESPP, CEOs directly align the interests of shareholders and management with rank and file employees. Well-documented studies show how companies that offer employee stock ownership plans are disproportionately represented on “Best Places to Work” lists, enjoy lower employee turnover, higher job satisfaction, and better business performance.[7]
When employees contribute to an ESPP, the purchase payments are considered paid-in capital, which accrues as tax-free cash on the company’s balance sheet. By using Cashless Participation to increase ESPP participation, a larger amount of paid-in capital will flow directly to the benefit of shareholders. This cash can be used for reinvestment, and more stock will end up in the hands of employees, who have a vested interest in seeing their shares grow.
In a recent survey conducted by E*TRADE[8], more than half of respondents under the age of 35 (57%) agreed that stock plan benefits are an important consideration when changing jobs. Enabling broader access to equity compensation helps attract talent in an increasingly competitive labor market. Further, by adding Cashless Participation, CHROs can increase total compensation for existing employees and create a multifaceted solution to talent retention and recruitment strategies.
Forward thinking C-Suites are using Cashless Participation to address wealth equality issues. It’s a move that can deliver greater employee trust and engagement and help drive better business outcomes.
[2] Fidelity Stock Plan Services, 2018
[3] Carver Edison Research
[4] Bureau of Labor Statistics Historical Data
[5] National Association of Stock Plan Professionals Data, 2017
[6] Carver Edison Research, Bloomberg LP
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