A Discount on Your Own Company Stock With a Look Back Built In
Employee share purchase plans let staff buy stock at a discount, often based on the lower of two prices. It is one of the few genuinely favourable terms available to ordinary employees.
How the Plans Work
An employee stock purchase plan lets employees contribute part of their pay over an offering period, then uses the accumulated amount to buy company shares at a discount, commonly up to fifteen percent.
A discount alone is worth having. The feature that makes these plans genuinely attractive is what happens on top of it.
The Look Back
Many plans include a look back provision. The purchase price is the discounted price based on whichever was lower: the share price at the start of the offering period or at the end.
The consequence is significant. If the stock rose during the period, you buy at a discount to the old, lower price. If it fell, you buy at a discount to the new, lower price. Either way the discount applies to the more favourable of the two.
With a look back, the plan produces a gain whether the stock rises or falls during the period. That combination is rare in any form of compensation.
| Stock during period | Price basis | Result |
|---|---|---|
| Rises | Lower starting price, discounted | Discount plus the appreciation |
| Falls | Lower ending price, discounted | Discount at the new level |
The Concentration Problem
The obvious risk is that you already depend on this company. Your salary comes from it, your career prospects are tied to it, and now your savings are in it too.
If the company gets into trouble, you can lose the job and the investment at the same moment. That correlation is exactly what diversification exists to avoid, and employees have experienced it repeatedly when companies failed.
The usual answer is to participate fully and sell promptly, capturing the discount without accumulating a large position. That converts the plan into a return on the discount rather than a bet on the employer.
The Tax Wrinkle
Tax treatment depends on how long shares are held after purchase, and holding longer can convert part of the gain into more favourably taxed income in some jurisdictions.
That creates a genuine tension with the concentration argument, since the tax advantage rewards holding and prudence rewards selling. The resolution depends on the size of the position relative to total savings, and the tax benefit rarely justifies a concentration that would be damaging.
Why Companies Offer Them
The stated reason is alignment, and there is a more practical one. Employees who own shares pay attention to the share price, and the plans encourage retention because participation typically requires being employed at the purchase date.
The cost to the company is real but modest, and it is a compensation element that employees value more than its accounting cost, which is an efficient trade from the employer side.
Why Participation Is Often Low
Take up is frequently well below what the economics justify, for reasons that are behavioural rather than rational. The mechanics are confusing, the contribution reduces take home pay immediately while the benefit arrives later, and the plans are explained badly.
For an employee with the cash flow to contribute, a plan with a discount and a look back is one of the clearest opportunities in ordinary compensation, and leaving it unused is a straightforward loss.
The Bottom Line
These plans combine a discount with a look back that applies it to the lower of two prices, which produces a gain regardless of direction. The real risk is concentration, since your income and savings would depend on one company. Participating and selling promptly captures the benefit without taking the risk.