ESPP contributions are typically made through automatic payroll deductions. During the offering period, which is the designated period when employees can contribute to the ESPP, a fixed percentage or a specific dollar amount is deducted from the employee's salary. These contributions are accumulated over the offering period and used to purchase company stock at the end.
Determining the Purchase Price
The purchase price of the ESPP shares is a crucial aspect influenced by employee contributions. There are generally two methods used to calculate the purchase price:
Lookback Provision: Some ESPPs employ a lookback provision that determines the purchase price based on the stock price at either the beginning or the end of the offering period, whichever is lower. This provision allows employees to benefit from any decrease in the stock price during the offering period. Typically, this can be anywhere from 6 months to 2 years.
Fixed Discount: Other ESPPs apply a fixed discount to the market price at the end of the offering period. The discount is predetermined and stated in the plan document, and it is subtracted from the market price to determine the purchase price.