(Guest Post by Gene Roberts, who previously wrote about the zen of couples budgeting)
If you are lucky enough to work for a company that offers an Employee Stock Participation plan (or ESPP), it should be a rather simple decision to participate. If it’s not, KEEP READING! I hate to see people walking away from free $$$.
When you participate in an ESPP, a deduction is setup as a percentage of your pay. Every 6 months the plan purchases stock in the company for you at a discount to the market price. The industry standard is about a 15% discount to market. That is what my employer’s plan offers, at a minimum. My plan, like many, takes the 15% discount off of the lower of the market price at the beginning of the period or the end. So if the company’s stock price increases over the 6 month period, you can really make a killing (as you will see below).
Some plans require you to hold onto the stock for a minimum period of time which can be risky in today’s financial environment. But many allow you to do what my company terms a “quicksale” and sell the stock a.s.a.p. The quicksale sells the stock as soon as the 3-day waiting period for settlement is over (from the purchase). And since in that short window there is the possibility that the stock price could plummet, there is no guarantee that this investment will not lose money. However that chance is very slight if you are able to turn right around and sell it in 3 days.
I checked the records for the last 12 years on my company’s plan. While in some cases the market price on the day of the quicksale had declined from the day the ESPP bought the stock, the lowest ROI for the quicksale was 10.2% (for reference, had the quicksale price been the same as the market price on the purchase date the ROI would be 17.65%). But you have to balance the slight risk that the stock will tank over a short period of 3 days against the chance that the stock price will have increased over the 6 month period of the program.
Even if the stock price declines over the period, you are still buying at the 15% discount to market. But if it goes up, you can make much more than the 15% discount. That stacks the odds heavily in your favor. The highest ROI in the 12 year history I researched of my company’s plan was over 50%. But as in all things in life there are no guarantees and your mileage may vary.
When the program announces the purchase I usually ask around and see who participated among my co-workers. I am astonished that so few participate in the program. By and large the argument that they always come up with is “You only make 15% on it – what’s the big deal?” More important than the minor (but annoying) misconception that a 15% discount to market means that the return is 15% (it actually represents a 17.65% ROI), I find it curious that those declining the opportunity seem to be confusing ROI with APR.
Whether it’s an investment or a loan, most of us are conditioned to think in terms of an annualized rate of interest. But when you incorrectly assume that a ROI is annualized you can’t compare it accurately with other investments which are.
In the case of my company’s six month ESPP, the money is not “invested” for a whole year. It is deposited in equally spaced intervals over the 6 month period. So some of the deposits have only been in the program for a very short time when the plan purchases. When you annualize the return on the investment this raises the rate significantly. I went over my pay records and recorded all the deductions for the program and put them into a spreadsheet. I set it up so I could compound interest daily as if the money was in a regular savings account. I then “played” with the interest rate until the interest earned matched the return I got on the ESPP.
If the ESPP “only” gets the 15% discount to market, the equivalent ANNUALIZED return is 67.5%!
The further upside if your program takes the lower of either the beginning or end of the period can be truly impressive. This last period my company’s stock did go up during the 6 months. The equivalent interest rate I would have had to earn would have had to be 136.95%!
Applying the lowest return during the 12 years I looked at, even that interest rate would have to be a 41% annualized return. The highest during that period would have been an equivalent 164% interest!
Nothing in life is truly guaranteed, but twice a year like clockwork I get one of the best returns on investment I ever get. It’s as close to a “sure thing” as I have come by. My only regret is that since the start of the economic downturn my company has reduced the percentage of my pay I can put into the program. But I put in the maximum I can and get all the benefits available from it.
If your company offers this program, and you aren’t already participating, I highly recommend giving it a second look.
Gene Roberts is a 41 year old machinery technician working in the semiconductor industry (BUM, , , bum, BUM, bum, BUM) and lives in Chandler, AZ. His net worth is about $282k and its growth has been conforming with the get rich slowly method all too well.
(Photo by Florida Keys–Public Libraries)
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I use to work for a company that offered stock options and I was all over it. I never understood people who wouldn’t participate, especially when they had the money to do so. It’s one thing if you’re strapped for cash and aren’t in a position to invest. But if you are, go for it! The company is giving you an opportunity to invest in the company you work for, and they’re giving you free money to do so. It’s a no brainer to me.
I’m going to have to look into my company’s. Our stock is rather volatile though and I think I have to hold it for a couple months before I can sell it. If I can sell it in 3 days though it would be worth looking into. Regardless I don’t’ qualify for another 9ish months.
@Call Me What You Want Even Cheap – Yup! Agree 100% with you. I still haven’t gotten over the shock of my old colleagues never contributing to our 401(k) plan either, when our company matched 100% of a 100% you put in! No vesting or caps or anything – other than what was legal. I think some people just take a while to “get it,” but hopefully they do at some point :)
@Lance@MoneyLife&More – Yeah, check it out when you can for sure. That way you’ll be ready to take advantage as soon as those 9 months are up! :)
I put in as much as I can too, but I cap the total percentage of the company stock at 5%. It’s a good dividend stock, but I wouldn’t to have too much dependency on one company.
I don’t know if 15% is still industry standard. A few years ago my company did the 15% and then some tax/accounting rules changed and they changed it to 5%. At 5% it wasn’t worth the extra aggravation to me (withholding $ and tax time) and I now pass.
What if the company’s stock looses signifigantly more than 15%? I’ve only worked for one publicly traded company and their stock currently trades at 1% of what it was when I was there.
My company caps your participation at 15% of your salary+bonus. We purchase every 6 months with up to a 2 year look back (resetting every 6 months if the price is lower). There is no 3 day wait to “quick sell.” It’s a no-brainer to participate to the max, but I, too, am shocked by how many of my coworkers don’t participate.
To preface, I used to work for WAMU in 2008. Like most major companies, we also had a ESPP. I remember vividly our stock go from mid-40s to less than $5 in 6 months. During the entire stock decline, employees became nervous and reached out many times on the internal company forum (a forum that all 20,000+ employees had access to) where the CEO (Kerry Killinger) continued to assure everyone that the stock was going to bounce back. Oh man, it was bad when the company went belly up that same year. That internal company forum blew up and all of the company execs disappeared.
So definitely YMMV. As an ESPP participant, you owe it to yourself to take the time to at least understand a few basics of stock market investing. Because in the end, that’s exactly what you are doing, playing the markets at a 15% discount.
I participate in my ESSP and love it. I set up an account and they pull from my paycheck so I never see the money before hand. Then twice a year I get an email telling me how much stock I’ve bought. Set it and forget it. Then I can cash it out for a dream home or awesome vacation or something years from now.
Thanks for the post! I literally just signed up after reading this. I’ve been considering doing it for years, but just had too many questions and not enough money to risk. this was finally th extra push I needed. My company has a quarterly espp at a 15% discount and this quarter closes tomorrow. It allows you to invest 2-10% your quarterly income. I am happy to say that I just invested 10%! My companies stock isn’t very volatile and it sounds like the dividends are around 4% each year. I feel great about this investment, thanks again!
I think Marvin makes a great point here. In 2008, when they were living high on the hog who would’ve thought that WaMu would go belly up. It’s important to make sure you have a safety net, because that could be your company. Jamie Dimon just lost $8 billion of Chase’s money on bad investments and no one has even batted an eyelash.
I’m a big fan of ESPPs in general, but just make sure that you are watching your company’s stock and the market, in general. You could lose all that money and your bosses will NOT be looking out for you.
That said, if I had the chance to get some ESPP stock, I would be all over that. As the late poet laureate Russell Jones once pondered, “Why would you not want some free money?”
My company does not offer this service since it is a privately held company, but If I ever have an opportunity like that I would do it in a heart beat. As long as it is not more than 20% of your networth you should be ok in case things go wrong with the company’s stock.
Why is everyone worrying about the company’s stock? Don’t you just get the 15% discount off the current price (or, better yet, the lower of the current price and a previous price) and sell immediately?
I’m sure this is usually a good idea, but in DH’s case he lost money doing it b/c his company went bankrupt.
@ all – I apologize for not responding earlier, but I was out of town and didn’t know that the article was getting posted so soon.
@Call Me What You Want Even Cheap – Amen, brother. That’s what makes budgeting so important – to help ensure you can take advantage of these types of investments.
@Lance@MoneyLife&More – Yeah, in this fluctuating market you want to make sure that you can sell right away.
@Joe@Retire By 40 – I agree it’s not a good idea to put all your eggs in one basket. As an employee, I already have my wages coming from the company. It would be too risky to carry a significant portion of my investments in the stock of the same company.
@bobbi – Luckily for me, my company still offers the %15 discount. They have reduced the % of my pay I can put into the program from each paycheck though.
I ran some quick numbers. At a 5% discount to market, the annualized return would be comparable to a 19% interest rate. Depending on how much they let you put into the program maybe it’s not worth it. But 19% still smokes most other investments with comparable risk.
@Edward Antrobus III – That’s why I sell my stock right away. This minimizes your risk. Were I required to hold onto the stock for a significant amount of time I would have to give it a lot more thought. But if you are allowed to sell immediately (3 days per stock sale settlement rules) this risk is minimal.
@Supadad33 – Wow, that 2-year look back thing sounds great when the stock price is going up. And without the 3 day waiting period there is exactly ZERO risk.
@Marvin @ San Jose Options – I disagree. If you’ll re-read the article I don’t advocate holding onto ESPP stock. Your wages are already tied to your job and if your investments are tied their as well you are doubly at risk should the company go south. Executive malfeasance aside, your risk of losing 18% in a 3 day period is minimal.
@Jenna, Adaptu Community Manager – I applaud you for saving for your future. However, I would be cautious about carrying a significant portion of your investments in the stock of your employer. For longer term goals you might consider selling the stock and putting the money into a mutual fund to lower your risk.
@matt – That’s awesome! I’m glad that I could help you make your decision.
@Big Dion – Yup, it’s always a good idea to keep an eye on your nest egg.
@ Emily – But that was because he held onto the stock. If you sell it right away, you should be good.
Thanks again for the post Gene, and for responding back to everyone! Hope y’all are having a great Father’s Day out there :)