ESPPs: Underutilized Wealth-Building Tool Hiding in Plain Sight
By: Charlotte Huger, CFP®
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Employee Stock Purchase Plans (ESPPs) are one of the most powerful yet underused benefits offered by many companies today.
While most employees are quick to sign up for health insurance or a 401(k), ESPPs often fly under the radar. But when used strategically, they can provide a an enhanced return on investment—something that's increasingly rare in today’s market. And yet, participation remains surprisingly low, with median enrollment sitting around 38%. That means a significant number of employees may be unknowingly missing out on this investment opportunity. If you’re not sure how to take advantage of this benefit, it might be time for a conversation.
The ESPP Advantage
The core advantage of an ESPP is the built-in discount—up to 15% off the market price of your company’s stock. Many plans also include a “lookback” feature, allowing you to purchase shares at the lower of the stock’s price at the beginning or end of the offering period. This creates a powerful return.
For example, if your company’s stock was $100 at the start and $120 at the end, a 15% discount off the original $100 would let you buy at $85. That’s a $35 gain per share—instantly. Few other opportunities provide that kind of investment potential. But to truly manage it, you need to understand how and when to act. Please note that some ESPP’s are subject to holding period before the investment can be sold.
For Example
Let’s look at some specific examples! ServiceNow has a fantastic ESPP that our clients truly enjoy (and you’ll see why in a second). They offer a 15% discount on the lower price between the price on the first day of the purchasing window vs. the last. Their window runs Feb 1 through Aug 1. Now, if we look at Feb 1 2023 to Aug 1 2023, the price of ServiceNow rose form $431.11-$613.56.
If you were in the ESPP, you would’ve purchased the shares at a 15% discount from the $431.11, meaning you bought them for $366.64. That’s a 67.44% rate of return! Microsoft, another fabulous company, also has an ESPP, but the discount is 10% and there is no lookback. Still a 10% discount every quarter is a return that is hard to beat elsewhere!
No investment is Perfect
Naturally, ESPPs come with a few important considerations. Chief among them is concentration risk: the danger of tying too much of your financial future to one company—especially the same company that also pays your salary. If your employer hits rough waters, both your income and your investment portfolio could suffer. Taxes are another area where strategy matters. Selling too quickly can lead to ordinary income taxation, while holding shares longer can trigger more favorable long-term capital gains. These nuances are exactly why many employees feel stuck or unsure of how to move forward.
Some plans also require a holding period that prohibits you from selling right away. With the volatility we can see with a single stock, this can wipe out your returns if the company or markets hit a rough patch.
With all of this said, a disciplined strategy can help mitigate the risks.
In Conclusion
If you’re unsure whether you’re using your ESPP to its full potential—or whether you should be participating at all—that’s where working with a CFP comes in handy. This is one of those benefits that should not be ignored, but often too complex to tackle alone. Let’s set up a time to talk through your options and build a strategy tailored to your goals.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Securities and investment advisory services offered through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial. LPLE and LPL Financial are not affiliated with Pillar Wealth Partners
