Reader Question: Forgo ESPP Share Discount?
JBW submitted a question to Consumerism Commentary alongside an earlier discussion of my own Employee Stock Purchase Plan (ESPP) shares and I’d like to highlight the question here.
I’m currently trying to decide what to do in terms of my employer’s ESPP. The discount is 10% and stock is bought on a monthly basis (the month following the payroll deduction). So far so good. The issue… a 1 year required holding period to get the 10% discount. My company’s stock has taken a hit recently (banking), but I believe it to stay at a similar level or go up slightly over the next year. Thoughts?
The standard disclaimer applies: I am not a financial adviser. My company’s terms are a bit different. We are offered a 15% discount and no holding period. However, as a designated employee, I have to wait until an open trading period to sell the shares. I think it’s generally good advice to sell your shares as soon as possible, whether you’re receiving a discount or not.
You don’t want to be too heavily invested in the company that employes you. Looking beyond just your financial investment, your company also has control over your job status. There’s always a chance of another Enron-like debacle, so it’s not wise to keep all your eggs in one basket.
For me, this risk outweighs the tax discount that long term gains provide over short term gains.
The shares are given to you as part of your compensation. Even when the stock price goes down from the time of purchase to the time of sale, you haven’t truly lost any money you didn’t have before. In fact, you can deduct these losses against other realized gains to lower your tax bill.
This being said, I haven’t had a chance to sell my third quarter ESPP shares yet. I can only trade my company’s shares at certain times of the year, and my trading window opened on Monday. Unfortunately, I’ve been swamped at work and have had no time to apply for preclearance. Otherwise, I would have sold my shares.
My company’s stock has been down lately, but with the 15% discount we receive, I still would be reflecting a short term gain if I sold.
Do you have additional or other advice for JBW? I’m not an expert by a long shot, but I’ve learned a lot in the past few years thanks to reading articles and knowledgeable commenters.
Article comments
I’d participated in ESPP for many years until the company made the plan less attractive – shortly after the government changed the rules about expensing options a few years ago. Not sure how these are related. Prior to the rules change we got a 15% discount plus lookback provision – comparing the price of share at the beginning of the quarter to the one when the purchase occurs and buying for the smaller price. The shares were bought at each pay day for no more than 10% of the gross, fractional if necessary. After the rules changed 15% became 5% and the lookback provision was eliminated. I figured 5% not enough to protect against market fluctuation, especially since we had a restriction on selling shares bought within the same “offering period” (July-to-July). There is no monetary penalty, but if you sell the shares bought within the same offering period you can’t buy any more shares until the end of the period.
I sold a little here and there, but I still have most of the stock. It worked out OK, so far, but I do have too many eggs in one basket and it makes me a bit uncomfortable. It just that every time I had sold a little, the stock went up greatly thereafter, which made every decision to sell seem wrong in hindsight. Except for in 2000s. The stock lost almost half of its value between the top of the bubble and its lowest point after the bubble burst. It regained some of its value recently, but it is still far from the top.
Interestingly though, I still have large gains. If I were to try to find shares on which I could show loss, it’d be difficult to find even 100 of them (out of 1600). 15% discount, look-back provision and mostly buying at different times and for different prices (and buying fewer shares when the price is higher) does help. Also, the fact that there were two or three splits even before the bubble, and the percentage of shares bought at high prices is very small.
Actually, the worst time for the company wasn’t in 2004, it was in early 90s. There was no question of company’s surviving in 2003, but in early 90s, it wasn’t clear. At that time, if the company went out of business, I’d lost money. At one point the stock dropped below break up value.
I think the decision to sell immediately isn’t always clear and depends on the company. There is always risk involved as Lucent’s example showed, but in some cases rewards may be high too. I think in some cases holding for a little bit of time makes sense since you have some protection against market fluctuation. Will not help in Enron-type disaster, but does help in case of fluctuations.
While I think you shouldn’t pass up what is effectively a free 15%, I certainly don’t think it’s good to have too many eggs in one basket. I used to work at Lucent, and I did that, and pretty much got socked in 2002. Now that I’m older and wiser, i would still take advantage of the ESPP, but would hedge it with a set of put options in an outside brokerage account. Effectively you can fund some of the put option purchases by the 15% discount you receive.
I also participate in an ESPP and I treat it as a savings account. Our stock is purchased at the end of every three months. Recent purchase was 10/31. Our stock is doing well, so I like the fact that I see gains almost immediately. I could sell right now if I wanted to, but there is no pressing reason to do so.
A year holding period for the 10% discount is unusual for an ESPP, but you could do well since your stock is lower right now. It can’t stay low forever.