For the last few years, I have been participating in my company’s stock purchase plan at the maximum level. Every paycheck, ten percent of my gross salary is withheld. At the end of each quarter the funds are used to buy my company’s stock at a 15 percent discount from the lower price of either the first day or last day of the quarter. As my company’s stock declined mostly due to the economy at large and the industry in which I work, this was a losing proposition. I decided not to sell the company stock until prices returned, rather than selling at the first available opportunity as I had been earlier.
So now I have company stock that I have been holding since December 31, 2007. About half of the shared purchased then and since then are in a losing position while half are now in a winning position. My only opportunity to sell this quarter is closing soon, so I should decide what to do. Here are some of my options:
- Sell all of it. It’s risky to hold so much in one stock, and I already have company stock in my 401(k). I can write off the losses against the gains to reduce tax liability.
- Sell the shares in a losing position. I can write off the losses against any realized gains if I sell stocks later this year.
- Sell nothing until they are held for two years. The stock will probably go up, and after two years, they will be long-term capital gains, taxed at a lower rate.
- Sell the shares in a winning position. This would help my cash flow, but I’ll owe income tax.
What would you do?
Mellody Hobson, the president of Ariel Investments, recently shared her favorite piece of advice to Money Magazine.
When I was 22, a friend who is very successful explained to me that no one ever got rich through earned income. “Look at all the great wealthy families,” he said. “From Carnegie to Rockefeller, it was never how much they made at work that made them wealthy – it was their investments.”
And that made me shift from thinking about a paycheck to thinking about building equity and long-term wealth. And it has helped me a lot. Instead of a raise, I ask for more stock.
This may be good advice for a senior level executive at a large corporation. Those who make the compensation decisions may have the authority to grant stock. The concept suggested by Mellody’s advice may also be helpful for those working at a small company at the onset. Then again, perhaps there is no cash available and the promise of stock is all that can be offered.
I have the feeling that most people are like me, however. They work at a large company and don’t have the option of bargaining for alternative compensation. My boss, for example, would not have the ability to simply grant me stock. I suppose that the vice president of my division could put a request through our human resources department, but in the end, it would still come from the same budget. So practically, I see no difference for the company between offering stock or cash as a raise other the simplicity of cash. I cannot see my large financial corporation seeing a stock grant as a preferable alternative to a typical raise.
Another issue I have with accepting company stock in lieu of cash is related to diversification and risk. An employee is deeply vested in the success of the company and the company’s desire to keep you. Look no further than Enron to see what happened to employees who relied too much on their own company. While the senior management at Enron lied to its employees about the company’s health, many employees suffered more during the company’s collapse. They suffered because they relied on the company for much more than just their income. In addition to salary, the employees most affected held too much company stock, particularly in 401(k)s. Enron actively encouraged its employees to buy company stock outside of retirement, as well. If your company’s stock started nosediving with imminent failure and the management decided to freeze stock so you could not sell it, how would your finances be affected?
So would you take Mellody’s advice? I think she’s right about shifting from an income-from-paycheck mentality to income-from-investments mentality, but is company stock the best path? Would you ask for more company stock in lieu of a raise?
The smartest advice I ever got, Money Magazine
I took some time this morning to apply for clearance to sell my company stock purchase plan shares. A recent question from a reader reminded me that I needed to do this before my opportunity would disappear for another few months.
The sell was executed this morning, and I was able to get a good price (relative to recent trading in the past few weeks) thanks to some good news announced by the company early this morning before the markets opened.
This is usually the largest amount of “market timing” I will do. It’s with 10% of my unimpressive day job salary each quarter, and I’m most inclined to sell the shares as soon as possible. I’ve been busy over the past several weeks, but I decided to set aside a few minutes to take care of it this morning. Thanks to the discount we receive when purchasing the shares, I should make several hundred dollars on the trade.
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.
This year, I’ve been contributing 10% of my paycheck to my company’s new stock purchase plan. At the end of each quarter, that quarter’s contributions are used to purchase company stock at 15% off the lower of either the quarter’s beginning or ending price. I’m only allowed to trade company stock during certain windows of time. Since my company’s stock price has been down lately, I wanted until the end of the open trading window to cash out. It’s usually suggested to sell as soon as possible, particularly since I am already invested in my company through half of my employer matching contributions in my 401(k) and a consistent salary. However, with the stock price down, I was hoping I could get at least the benefit of the full 15% discount.
Waiting until now — the end of the open trading window rather than the beginning — paid off, but I may not be as lucky next time.
At the beginning of the year, I started participating in my company’s newly-offered employee stock purchase plan, which gives us the opportunity to automatically deduct up to 10% of our paychecks and defer that money for use at the end of the quarter. At that time, we are able to purchase stock at a 15% discount off the lower of either the price at the beginning or the price at the end of the quarter.
The quarter ended over a month ago, but I was restricted from selling stock until a few days ago. The transaction settled today, and I got a decent price on the stock, but definitely not the highest of the day I executed the trade.
Nevertheless, with the discount, I was able to buy the shares at around $70 and the selling price was over $100. Even though E-Trade charges a $19.95 commission for selling these shares, and the SEC felt the need to charge me an additional $0.03, I feel it is a worthwhile short term investment.
As far as the tax implications go, E-Trade has a detailed ESPP tax guide [pdf] that explains things more succinctly than I’ve seen anywhere else. Since I haven’t been enrolled in the ESPP program for two years before selling and I haven’t held onto the stock for a year, I’ll have to pay a portion of my gain as ordinary income (the difference in the discounted stock price and the market price at the time of purchase) and short-term capital gains (the difference between the market price at the time of purchase and the price I paid to sell).
Thankfully, the guide I linked to has a step by step procedure for using the information reported on W2s and 1099s to report the taxes correctly to the IRS.
I have a few reasons for not holding ESPP shares longer to take advantage of long-term capital gains rates. First of all, I’m already invested in my company’s stock through my 401(k), and while I believe the 20-year prospects for my company are very good, I don’t want to overload on one specific company. My salary is also tied into my company’s performance, so I’d like to limit all-around risk.
I also don’t believe the 15% tax rate for long-term gains will be around forever, but that’s just a hunch.
Although it was first announced in 2005 to begin in 2006, my company’s employee stock purchase plan was not finalized until a few months ago, and scheduled begin this month. On Friday, I’ll receive my first paycheck with 10% of my salary automatically deducted and transferred to a holding account at E*Trade. There it will collect minimal interest until the end of the quarter, at which point there will be an automatic purchase of company shares at a 15% discount of the stock’s price from either the beginning or the end of the quarter.
I’m already deducting a large amount from my paycheck, including a 16% 401(k) investment and savings. In order to cover the shortfall in cash flow, I’ll transfer the 10% of my salary from the side income. Once I purchase and immediately sell the shares at the end of the quarter, I can pay back my savings account with the proceeds.
Carnival Update: We now have three submissions for the inaugural Carnival of Personal Finance. If you’re a blogger and you’ve written about personal finance recently, feel free to submit a link to an article you’re proud of!
At work, we had a division meeting with our vice chairman today. Basically, the company is in good shape. During the question and answer session, one individual asked, “If the company makes its goal of 12% ROE (return on equity) this year, what’s in it for us?”
The vice chairman stumbled for a moment, but then described a new stock purchase plan that will be going in effect during the first quarter of 2006. At that point, employees will be able to buy company stock, up to $25,000 worth each year, at a 15% discount off the lowest stock price in the thirty days leading up to the purchase.
It doesn’t sound like a bad deal. My only concerns are the fact that the company’s stock has been doing rather well lately. Perhaps it is overpriced and will head down. Secondly, I don’t want to be overweighted on company stock in which half of our 401(k) company match (so 2% of our salary) is required to stay invested.
It will be interesting to get the details of the new stock purchase plan. I’d like to see how long we are required to hold on to the stock before selling. The 15% discount sounds like a good bargain.
Is this a common benefit?
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