Equity Compensation as a Way to Help Employees Build Wealth

Sixty percent of workers who have an equity compensation plan intend to use the money to help fund retirement, according to a survey of 1,000 equity compensation plan participants by Schwab Stock Plan Services.

Amy Reback, vice president of Schwab Stock Plan Services, says having a diversified portfolio of both taxed and tax-deferred savings is a good strategy.

And equity compensation plans are not just for executives—employers can make them available to rank-and-file employees as well. However, lower-income employees may not feel they can afford to participate in them. Aaron Shapiro, founder of Carver Edison in New York City, says, on average, only 30% of workers are able to participate and very few of those max out contributions.

He says his mother worked for a health care company that offered an employee stock purchase plan (ESPP), but she didn’t feel she could max out her contributions. “By not doing so, she lost out on a million dollars that was created for her to get,” he says. “That’s why I founded this company and the Cashless Participation product.”

Cashless Participation is an enhancement to ESPPs that allows employees to maximize their ESPP contributions with limited payroll deductions. Essentially, Carver Edison issues an interest-free loan to employees who elect to participate in their ESPP. With that loan, their ESPP administrator purchases additional shares on their behalf at the end of the offering period. The loan is then repaid instantly and the employee gets a net benefit. Participating employees own more shares than they would otherwise have been able to afford without seeing their paychecks shrink.

Shapiro explains that the interest free loan is sent to the company on employees’ behalf and the company sends Carver Edison shares to directly repay the loan. Carver Edison then sells those shares in the market to get its money back. In full disclosure, Shapiro says employers pay a per eligible employee per year fee and Carver Edison makes a little in transaction fees when it sells shares in the market.

Still, he says, the product is an opportunity for companies that want to help employees but can’t spend a lot of money because they don’t know what the future will look like. It’s a way to help employees build assets they may have lost in their retirement accounts.

Shapiro also points to a case study that shows that even during the height of the COVID-19 pandemic, participants realized great results. Medical device manufacturer PAVmed chose E*TRADE as its employee stock purchase plan provider, which allowed it to separately add Carver Edison’s Cashless Participation.

During its inaugural ESPP offering period using Cashless Participation, PAVmed immediately achieved a 93% employee participation rate. Approximately 77% of participants used Cashless Participation to purchase shares of their company stock without needing to divert additional dollars from their paychecks.

In a typical ESPP purchase with no price appreciation, participants would break even on their investment if the underlying stock price were to drop 15% below the price on the purchase date. But for some participants who used Cashless Participation, assuming no price appreciation, the company’s underlying stock price would have had to fall as much as 73% before participants would hit their breakeven point.

By the close of their first stock purchase, participants had contributed an average of $3,757 through payroll deductions and held stock positions valued at $9,130. And ESPP participants who used Cashless Participation fared even better—holding shares valued on average at $16,526.

“If participants had put money into their retirement plans when the coronavirus hit, they would have lost money. But, with our product, the stock would have had to have gone down more than 50% before they started losing money,” Shapiro says. “This is a complete change in risk.”

He adds that, especially during a time when employers want to add value to their employees, “employers can deliver what is equivalent to a raise of about 4% each year by offering participation in an equity compensation plan.”

A copy of the case study may be requested from https://carveredison.com/press_etrade.