An employee stock purchase plan (ESPP) lets employees purchase company stock at a discount of up to 15 percent off of its fair market value. An ESPP isn’t a retirement plan — that would be an employee stock ownership program (ESOP), in which your company contributes stock to a retirement fund. Instead, an ESPP allows employees to purchase stock and do what they want with it, whether that’s selling the stock immediately or holding on to it for years. By starting an ESPP, you can:

1. Reward employees without raising their salaries.
2. Motivate employees by tying their total compensation to the performance of the company.
3. Provide an added perk without greatly affecting your bottom line.

Action Steps
The best contacts and resources to help you get it done

Learn how ESPPs work

An ESPP doesn't provide employees with a 15 percent off coupon for buying stocks. To get the discount, they must have funds deducted from their paychecks.

I recommend: Read the basics of ESPPs to see whether they'll appeal to your employees before you go through the expense of setting up a plan.

Learn the law

For employees to get the full benefits of an ESPP — namely for purchases of stock by employees to be tax-free — your plan must meet the requirements of Section 423 of the Internal Revenue Code.

I recommend: Look up the Section 423 requirements to learn what's involved for both you and your employees.

Find an ESPP manager

While ESPP basics are easy to understand, the devil is in the (many) details.

I recommend: Rather than ask your own accountant to manage an ESPP, consider hiring a professional investment firm that specializes in them, such as Mellon Investor Services, Computershare or Fidelity Investments.

Test your knowledge

Before you pitch an ESPP plan to your employees, make sure you have the lingo down pat so that you can answer their questions.

I recommend: MyStockOptions.com offers an ESPP quiz that you and your employees can take to test your understanding of this benefit program.

Get employees on board

Despite the 'instant profits' that employees can make on ESPPs, the sign-up rate for such programs is low. A study by Hewitt Associates, a human resources consulting firm, found that only 37 percent of executives participate in their company's ESPP, and the numbers decline with the level of employment: Only 16 percent of administrative employees participate.

I recommend: Get advice on how to explain the benefits of an ESPP to your workers.

Encourage employees to think long-term

Employees can sell the stocks they purchase through an ESPP immediately for quick profit, but selling quickly may not be the smartest thing they can do.

I recommend: Explain to your workers that flipping their stocks will give them a quick financial boost, but keep them from earning far more in the years ahead.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Keep employee expectations reasonable: ESPPs aren't guaranteed to make money in the long term.
• •  Remind employees of the enrollment period deadlines so potential participants don't miss out.
• •  Teach employees that they need to hold onto the stock if they want to avoid certain taxes.
• •  Consider providing employees with a company-sponsored accountant come tax time to help them handle sales of stock bought under an ESPP.