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
Published or updated August 4, 2008.
{ 6 comments… read them below or add one }
Definitely not. I would take it as a bonus but would I take it in lieu of a cash raise that puts more moolah in my pocket? Nope.
Yes, the wealthy have traditionally become wealthy due to their investments and I hope to someday build wealth by investing in things other than my retirement accounts. But I’m going to invest in mutual funds, a few select single stocks, and maybe real estate and not try to build wealth off of company stock. I honestly believe that those Microsoft Millionaires of the late ’90s and Google millionaires of the past few years, all who became rich off of their company’s stock, are rare occurrences, although I’m happy for them.
Definitely not. I’d take the cash and invest it in my existing portfolio. I already took the time and effort required to construct it, why would I want to mess it up by overweighting a single stock?
Of course, most people would probably take the cash and spend it so if you’re one of those people, perhaps you could make an argument for taking the stock instead. Maybe.
It’s pretty simple: Don’t take an equivalent amount of stock versus money .. take the money every time. However, if you can get more stock from the company than money, then you’re obviously better off with the stock. You can convert from one to the other so just get the biggest number!
Some companies offer stock based compensation that has to be held for awhile to keep people around. This can be highly lucrative to the employees and is for sure a benefit to companies. It is lucrative for employees when the stock is growing and/or when the amount is far greater than a cash bonus would be. If it’s just equivalent to a cash bonus, then it’s a bonus with a bunch of strings, also known as a hassle that will limit your future choices.
As someone who has worked at multiple startups, you really need to analyze each situation independently. If the company prospects are good, the amount of equity is reasonable, and if it appears that the company will grow at a rate that’s higher than what you could earn elsewhere, then it is probably worth the risk of taking the stock.
Only way I’d take the stock is if I could liquidate it fairly quickly and the sale of it, including taxes withheld, would still be more money than I would get by accepting the cash raise. I wouldn’t want a large proportion of my portfolio being in the company I worked for – that’s just too much of your personal wealth (stock and salary) tied up in one company.
Definitely a bad idea to take the stock if you have a choice. Let’s say your company takes a turn for the worse. Now you get laid off and your stock declines in value. It’s a double punch in the gut.