This was written as I left Nortel, when I was laid off, but it makes an excellent point about putting too many of your financial eggs in your employer’s basket.
As part of the capping of my pension and putting me into a different kind of pension, my company automatically put me in the stock purchase plan, where every quarter the company will allow me to purchase stock in my company at a 15% discount (which in turn becomes a taxable benefit and I am taxed at the end of the year for that 15% discount) very quarter year. This stock is then available to me, to do with what I want, and the amount of my pay cheque that I wish to commit to this stock purchase plan is variable as well (currently I have started at a very low percentage), up to a maximum of 10% of my salary (and there is a monetary value which is a maximum that you can purchase in the year).
Is this a good thing? I don’t really know, but let’s weigh a few points:
- If I hold this stock, I am investing more money in my company. As has been pointed out by a few of the financial bloggers, I am already heavily invested in my company, in that they pay my salary, now I am putting more money into this company. Putting this many eggs in this basket might be imprudent, with any company (unless you are working for a bank, in which case invest away).
- If the company stock is volatile, holding the stock could mean that I get taxed on the 15% discount (as straight work income) however that value may disappear from the company stock, and thus I will be taxed on something that does not exist any more.
- Are there other points I am not thinking about? I’m open to further points that I might be missing here.
So the obvious strategies for this are:
- As soon as the stock is available to me, sell it right away, and realize the 15% discount and then invest it in some other investment vehicle (presumably something less volatile than the stock might be).
- A corollary to that would be sell the stock right away and take this money and put it on the largest debt that I currently have (Mortgage or Car Loan), given the money has already been segregated from my normal funds. I still have to pay the 15% discount, but that is now thrown onto a debt accruing interest already.
- Transfer the stock into my RRSP right away, and thus hide the 15% discount in the RRSP and have an 85% add into the RRSP, and then either hold or sell the stock on the basis of how comfortable you feel holding it.
- Hold the stock as an investment vehicle, and continue to hold it in that fashion. Set up stop sell rules for it, and forget about it.
I’m not completely sure what my plan actually is going to be, but for now I am leaning towards the corollary of idea #1 (Grab that Cash with both hands and, pay some bills (to paraphrase Pink Floyd)).
Any ideas from the readers?
Re: Traciatim’s comment at the top
There would not be any capital gain if sold right away since the value of the stock was $10 when purchased and $10 when sold. The only tax is on the income from the discounted price ($10-$8.50). Assuming 40% income tax, the net gain is $210 minus transaction fees ($30, ouch) and $180 (or 9%).
9% is not bad for investing $2000 spread out over each paycheque over 3 months. In fact, the average amount of time that money was “invested” is only 1.5 months. Think about it, the first deposit earned 9% over 3 months (36% APR) but the last deposit earned 9% over two weeks (936% APR). It averages out to about 80% APR.
Can’t beat that anywhere.
True, you’ll end up paying some tax if you take part. But when else will you be guaranteed a 15% return? I would definitely take part in the plan.
If it were me it would depends on the stability of the company I’m working for. If you work for a fairly stable blue chip ie- bank, telus, manulife etc… I’d probably contribute the maximum 10% allowed for an instant 15% return. A 15% instant return is great annual return for a blue chip dividend payer let alone an instant return.
If on the other hand the company was a new startup XYZ.com then ya it might be prudent to contribute less than the max (or sell right away to secure the 15% gain). If it is a big blue chip that you work for I don’t really buy into the argument that you’re heavily invested in the company because you work there. For example, if you work for BMO and got laid off what have you lost? Maybe a few months pay when you look for another job.
Excellent points that I hadn’t thought of. -c8j
You are forgetting that you will have to pay capital gains on the 15% as well if you sell right away. Plus the transaction cost (at least with my companies ESPP) is really high with the broker they used.
Say for instance you made a $2000 quarterly purchase for the stock valued at $10. You get the stock at $8.50 so you receive 235 shares and a tax bill of 40% of the 350 bucks leaving you 210 left as profit. So you decide to sell this right away and realize your gain and have a transaction fee (in my case it was 30 bucks, so I’ll use that) so you have a 210 gain – the 30 bucks making a 180 capital gain, you now will lose about 22% of that to tax as well leaving you with around 140 bucks.
So you are gaining 140 bucks a quarter or 45 dollars a month for the hassle. Also, depending on volatility between the time the transaction happens, the stocks appear in your account and the sale is processed you could be exposing yourself to risks. Is it really worth it?
When I participated in mine I was actually using it to save for Christmas presents each year, so I would start watching around mid October until the start of December for what I thought was a good price and then sold. After all the math in my situation it worked out better just to have a high yeild savings account instead. The savings account was much safer, and easier to manage, plus took far less of my time around an already hectic time of the year.