Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Deferred Stock Purchase Plan

What it is:

A deferred stock purchase plan is an uncapped stock contribution with an employer matching the contribution that vests as the employee provides additional service during a deferral period. 

How it works (Example):

In a deferred stock purchase plan, employees purchase company restricted stock on a pre-tax basis using income that would otherwise be paid as taxable salary or a bonus. These stock purchases would be fully vested, but their delivery and taxation would be delayed until a pre-established date in the future.  In many deferred stock purchase plans, the company also contributes a matching share of stock to the employee at the future date.  

Why it Matters:

Deferred stock purchase plans have several benefits to both the company and the employee. These plans provide an effective equity-based method of compensation that also creates shareholder value (i.e. the company retains talent and gets an equity investor at the same time). These plans also provide an incentive for the employee to remain with the company since they will be leaving the company's contribution of the stock "on the table" since it only becomes available at a future date.  For the employee, the use of pre-tax dollars to purchase stock along with the matching stock contribution from the company is an efficient approach for increasing their equity holdings and lowering their immediate tax liability

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