Employee Stocks: The Hidden Threat
The fact is, a lot of companies offer their own stocks to employees, either at discount rates, as a bonus or in some other capacity. These shareholder workers generally do not turn them down and their enthusiasm may vary, but they all rely on these stocks in some form or another. Arguably, some pay them no mind at all, focusing on their career instead, while others flock at the opposite end of the spectrum, entrusting a large portion of their retirement fund to a stock that can go under at any point. But is this really a sound idea? Let’s find out.
A Fair Share of Trouble
First and foremost, owning stocks is not necessarily a bad thing in itself, and it can be profitable if done correctly. Furthermore, owning a share of the company you are working at can give you a sense of belonging and even motivate you and the other employees to work even harder and be more dedicated than ever. By giving you a personal stake in the company, albeit a miniscule one, the employer hopes to gain your confidence and undying devotion, but you could still get sacked at any point, as the handful of shares does not exactly grant you a place on the board. Also, the most successful companies are typically reluctant to take this step, even though it is far from being unheard of.
However, if one takes a look at this situation not as an employee but rather as an investor, the whole thing starts to take a radically different turn. Becoming attached to your belongings is detrimental to your finances as an investor. Typically, hoarders do not make great investors. From this perspective, it seems the only source of income is also expected to make a return on the investment – which is a risky situation, to be sure.
Think of it this way: not only does your salary depends on how well the company is doing, but your entire provision for old age could disappear in an instant. Investing money is risky on its own, but investing your hard-earned money back into the company from whence it came can seem ludicrous to the point of absurd. Forget putting all your eggs into the same basket, this is like putting them back into the same chicken, strangely enough. So why would anyone want to do this?
The Worst Case Scenario
Over the past few months, a large number of companies lost a sizable portion of their value due to volatility and several shattering events including Brexit, of course. In 2015, it is estimated that workers who own shares in these companies in the U.S. alone lost over $1 billion on the stocks of their own companies, either by overinvesting in them or through sheer price action. In general, employees working for the oil companies have had it the worst over the last few years, and this trend is bound to continue as time passes by.
Of course, some companies put a limit at the amount of assets of an individual employee that is allowed in their portfolio. Some do it for legislative purposes, others are wary of PR incidents while the most simply feel obligated to limit the exposure of their employees, and look good in public for doing so. Two birds with one stock, so to speak.
Usually, this limit ranges to anything between 20 and 35%, although there are exceptions to this rule as well. Still, there is hardly anyone who could easily afford to lose a fifth or a third of their life savings – especially as their retirement age is drawing nearer and nearer – and not feel the impact. In fact, such an event would be catastrophic to most people, for more reasons than anyone really cares to guess.
For example, people who lose a third of their life savings on the company they are still technically working for are going to be financially strapped for pay as well. It would mean the company is doing so bad that it is likely forced to sack a huge portion of their employees, while those lucky enough to remain would likely be “gently encouraged” to take a significant pay cut to help their company make it through the tough times.
So, in this case, a person in their 40’s or 50’s would lose a third of what they had saved up to that point, along with their job or at least take a severe pay cut. Where would they get another employment? Who in their right mind would guarantee to buy off such stock at fair prices? Let us not forget that, when push comes to shove, and the company goes bankrupt, it is the bondholders who get cashed out first, and are usually the only ones to actually see their money, as there is hardly anything left for everyone else.
So this 35% rule is there to actually “protect” the employees – from themselves, apparently. It seems far more beneficial for an employee to acquire some stocks at a discount, wait for them to rise and sell them as soon as possible, using that money for their own retirement fund or whatever else they had in plans. There should be no limits on this kind of behaviour, at least by most employers.
In fact, it is not uncommon for a company planning to release a portion of their stock to offer some to the employees beforehand – usually at a discount in the vicinity of 15% or something along those lines – before they allow the open market to do its thing. Of course, they expect the employees to keep these shares and stay even more committed to the company, but there is hardly a way that they can keep track of what every single employee is doing to their shares. So, buying shares at discount prices and then immediately selling them on the open market might be a neat one-time bonus to one’s finances.
The Selling Point
As for the practice itself, opinions are divided on this matter. While allowing ordinary employees to own a portion of the company they work for is perfectly legal and considered to be a legitimate and innovative business practice, many point out the other side of this coin. The side they are referring to is nowhere near as nice, and it touches upon the fact that employees who choose to partake in this venture are taking “excessive risks” (according to the U.S. Supreme Court).
Naturally, some feel like they do not really have a choice in this matter as refusing could easily land them in a lot of trouble with their bosses, while others simply believe this is the best course of action. In some rare instances, there have been companies offering stocks to their employees in place of a pay check as a temporary measure, but these can be safely left out, as any company that finds itself in that position is not long for this (financial) world.
The entire “selling” point for this practice is that employees who choose to save money in shares of the companies they are working for are going to see a noticeable increase in their savings and that this will actually benefit them. And, to be fair, that is true in some instances, but only for as long as the company in question has their priorities right. Those companies that take seriously their duty to increase or even maximize the savings of those employees who chose to invest in them will always exist, but they will not always succeed, and that is what lies at the very centre of this issue.
What so few people fail to comprehend is that their investment portfolio has two portions. One is the financial capital that these investors own. This means the money they have managed to save up, along with any bonds, stocks and various other assets that they somehow managed to acquire – legally, of course. The other part is the human capital, meaning any and all future earnings that they are expected to make in the course of their career.
So one part is everything they own in terms of money and financial assets, and the other is the future revenue that they expect to make in their lifetime. As a careful reader might have noticed, neither of these are entirely at the control of any single man. An investor has very little say in how much their portfolio is going to be worth the next day, as sudden events can wipe out a portion or the entirety of their present or future capital in an instant. Likewise, it could make the value of a portfolio skyrocket under the right conditions, although those are extremely rare and very far in between.
The thing is, if their present and future capital are linked, like in the case of a person who dedicated everything they own to a single company and the stocks of said company, then a single catastrophic event might be all it takes to push them over the edge of financial ruin. The more that financial and human capital of the same person have in common, and the closely they are related, the greater the risk that said person is taking.
Think of it this way: the value of everything you own fluctuates. The house or the flat you are living in is not necessarily worth what you paid for it – especially if the housing market starts fluctuating. The same applies to any property you own, including the stocks of your employer. The way people cope with the risks and manage them is through diversification. In other words, the chances of all of your property suddenly losing value and you suddenly losing your job at the same time or in quick succession are astronomically slim, provided that your assets are properly distributed. Also, some of your property will retain some inherent monetary value even in the worst case scenario, which is more than you can say for your stocks.
The New Trend
It seems that more and more companies are actively encouraging their employees to diversify their portfolios and actively trade stocks. As a result, the number of people who own stocks in the companies they work for has more than halved in comparison to what it was ten years ago. Still, there is some resistance to the idea among the ordinary workers. After all, managing a portfolio full of stocks of companies they know nothing about compared to the one they work for… It is understanding to think how such a portfolio could be even riskier than the one consisting of a single stock. Is that really the case? Well, if it were, then those people who trade indices would have been put out of business a long time ago.
Overall, owning shares of the same company you are working for can be a stimulating and lucrative experience. Whether the goal is to acquire shares at a discount for a quick profit or holding onto them in order to increase the total value of your savings is a worthy goal. However, do not forget that this is a business same as any other, and that some tough calls have to be made from time to time. Either you are the one making them, or they are going to be made on your behalf.