My sister called me with an interesting investment question last weekend. She works for a large international oil company at their Calgary office and the company has just announced that it will be starting an employee stock purchase program. Under this program, she could arrange for automatic deductions from her pay (up to 5% per year) to purchase shares in the company at fair market value. After two years, the company would start matching the number of shares purchased. Her question was whether this was a “good deal”. These are the details based on what she recounted to me- I’m still waiting to see the actual package that has been put together.
First, I should say that I’m quite proud of little sis for paying attention to these type things. Despite her affinity for fancy purses and shoes she has done a great job of setting up retirement savings and looking at other investment options, although I suppose that she should be proud of me- she’s got a business degree and works in accounting, while her deadbeat brother has a liberal arts education yet has become a regular viewer of the Business News Network.
The benefits of an employee stock program are clear- it allows the employee to invest automatically (and generally without trading commissions) in a business that he or she (hopefully) understands. From a corporate point of view, it also gives employees an incentive to ensure the company is operating in an efficient and successful manner. But the biggest benefit to such a program would be the matching option, as it ensures a certain return on investment. Just as employer matching on RRSP (or 401K) contributions is essentially “free money” and should be maximized as much as possible, an employee stock program that sees employer contributions offers and excellent opportunity to grow an investment portfolio. It should be kept in mind that there are likely tax implications arising from this arrangement that will eat into those returns, though.
There are drawbacks, too. The basis for any investment should always be thorough and objective research of the company’s financial and business situation and future prospects. At first glance, employees should be in a better position than just about anybody else to assess the stability of their company. In reality, there is likely to be a certain level of overconfidence and bias in making these assessments, never a good basis for investment decisions.
Even more concerning is a potential lack of diversification. 5% of your income is no small chunk of change, and tying up what may be a significant portion of your investment portfolio in a single company is never a good strategy. There is also a danger that you’ve got more than just your investment eggs in one basket- your job is tied in there, too. In the event that the company runs into hard times, you could find yourself both unemployed and with your investments wiped out. Sorry sissy, you’re not sleeping on my couch.
My overall assessment is that an employee stock program such as this one offers an excellent opportunity to grow your portfolio, but the risks must be managed by ensuring that you remain properly diversified. Stay objective, and don’t let a misplaced sense of loyalty or corporate optimism lure you into making bad investment decisions. And most importantly, don’t get all West Jet-ty on me and start telling me “I’m not just an employee, I’m also an owner”.
What do my more investment-savvy readers think about employee stock programs?
Photo by Nicole Lee.
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{ 7 comments… read them below or add one }
It’s strange that they don’t start matching until two years in. Do they retroactively match, or only match from two years on?
Can she sell the shares once she has purchased them through the program? If so, she could remain somewhat diversified if she sells some shares (after purchasing & holding the shares long enough to get the company match) and purchasing other investments in different markets.
@ David V - I found that feature strange as well, and I’ve asked her to get the full details of how it the matching would work, although she understands that the matching will be retroactive. I’m not sure if the delay is meant to encourage people to stay invested, or if it is actually an issue of seniority.
@ Victoria - Apparently, she can sell the shares at any time so she certainly could sell off as appropriate to keep diversified. That may actually be a good strategy…
Wouldn’t do it unless the company matches everything that she bought in the first two years. In that case, depends on the fundamentals and outlook for the company and whether it pays a dividend.
Those conditions sound odd. Maybe does she mean that the employer matched shares vest after 2 years? (eg, if she sells her shares before they’ve sat for 2 years, she gives up the employer shares. On the 2 year anniversary, she’s granted the employer shares, or it could be done gradually over the 2 year period)
Either way, treat it as an investment decision. Work it out in Excel, knowing that when you get the employer grant, your stock value effectively doubles. Then assess whether or not you have the discipline to ride out any storms before you vest.
As an aside, at a former employer, we were allowed to contribute up to $1200 per paycheque to our EPP, and every quarter we’d get to buy stock at a discount based on stock performance, but it was always at least 15% off. There were no restrictions on when we could sell, so several of us would go all in and sell as soon as we got the stock. This was worth several thousand a year — there were people that got almost nothing in their paycheque and lived off a line of credit, but it still brings you out ahead.
Sean, I got a copy of the terms last night and you’re right- the shares vest after two years. That makes much more sense than how I had initially understood it, and changes the assessment a little, too.
Does the company pay any kind of dividend? That could be a factor, too. I agree with the general sentiment of some of the other posters–cycling out of the stock on a regular basis to ensure steady gains and overall diversification.