How much to contribute in Employee Stock Purchase Plan?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
beachbum5011
Posts: 31
Joined: Thu Apr 06, 2017 8:26 am

How much to contribute in Employee Stock Purchase Plan?

Post by beachbum5011 » Sun Apr 14, 2019 7:09 am

I am trying to figure out how much percentage(from 1-15%) of my base salary, bonus, incentive comp to contribute for my ESPP.

The details...6 month average look back from Oct 31,2018 to April 30,2019. Then they discount 15% off of the average stock price. I am locked in to the price for 24 months and will not be able to increase or decrease the contribution amount. I am however, able to fully remove myself from the ESPP if I see fit with a written letter prior to the 4 eligible buy dates within the 24 month buy period. Currently I am investing 11% in my 401k and the company matches up to 6% with company stock.

Looking for advice!

dbr
Posts: 28540
Joined: Sun Mar 04, 2007 9:50 am

Re: How much to contribute in Employee Stock Purchase Plan?

Post by dbr » Sun Apr 14, 2019 8:51 am

I would say the two most common answers is to contribute the max and sell out as soon as the plan allows or decide you don't want money tied up in risky own company stock and just skip the plan altogether. Probably the thing to consider is what fraction of your assets ends up owning own company stock if you always liquidate as soon as possible. Under no circumstances should you start accumulating company stock.

libralibra
Posts: 381
Joined: Sat Jul 30, 2011 2:01 pm

Re: How much to contribute in Employee Stock Purchase Plan?

Post by libralibra » Sun Apr 14, 2019 11:35 am

This is one of the better ESPPs which are becoming much less common now. You essentially get a 2 year option, which is a great deal (assuming the 6 month price resets whenever it goes down, but doesn't reset upward during the 24 months). I used to put in the max when my company offered a plan like this.

Furthermore, you may end up with a big embedded gain when you purchase in the 3rd or 4th period if the stock has been going up the entire time. You will then need to make the decision of whether to hold for a whole year to get LTCG treatment or to take the risk-free money and run.

miket29
Posts: 77
Joined: Tue Jun 20, 2017 9:07 pm

Re: How much to contribute in Employee Stock Purchase Plan?

Post by miket29 » Sun Apr 14, 2019 6:41 pm

beachbum5011 wrote:
Sun Apr 14, 2019 7:09 am
I am trying to figure out how much percentage(from 1-15%) of my base salary, bonus, incentive comp to contribute for my ESPP.

The details...6 month average look back from Oct 31,2018 to April 30,2019. Then they discount 15% off of the average stock price. I am locked in to the price for 24 months and will not be able to increase or decrease the contribution amount. I am however, able to fully remove myself from the ESPP if I see fit with a written letter prior to the 4 eligible buy dates within the 24 month buy period. Currently I am investing 11% in my 401k and the company matches up to 6% with company stock.
If you are not maxing out your 401K (19K/yr before age 50) then before doing anything with the ESPP I'd increase my contribution. Also the match with company stock is risky; can you sell it once you vest and buy something else?

As for the ESPP, it is free money if you do same-day or a quick sale. 15% return over 6 mos is pretty good! I'd invest as much as they'd let. As soon as each 6 mos period expires and they buy the stock for you, immediately sell it. In some ESPP plans you can actually set up a same-day sale so they purchase it and then sell it the same day. Holding it for a few days until you can sell if you can't do that isn't too risky (YMMV).

MotoTrojan
Posts: 3796
Joined: Wed Feb 01, 2017 8:39 pm

Re: How much to contribute in Employee Stock Purchase Plan?

Post by MotoTrojan » Sun Apr 14, 2019 6:48 pm

6% match in company stock is the default? Ew. Can you sell that sameday?

User avatar
CyclingDuo
Posts: 2190
Joined: Fri Jan 06, 2017 9:07 am

Re: How much to contribute in Employee Stock Purchase Plan?

Post by CyclingDuo » Sun Apr 14, 2019 8:27 pm

beachbum5011 wrote:
Sun Apr 14, 2019 7:09 am
I am trying to figure out how much percentage(from 1-15%) of my base salary, bonus, incentive comp to contribute for my ESPP.

The details...6 month average look back from Oct 31,2018 to April 30,2019. Then they discount 15% off of the average stock price. I am locked in to the price for 24 months and will not be able to increase or decrease the contribution amount. I am however, able to fully remove myself from the ESPP if I see fit with a written letter prior to the 4 eligible buy dates within the 24 month buy period. Currently I am investing 11% in my 401k and the company matches up to 6% with company stock.

Looking for advice!
Look at the entire package you are receiving from the company. Your human capital is producing income for you from the company. That alone, is enough or "plenty" for most to have invested in the company. The ESPP is a great way to make the 15% return immediately even though it is funded with after tax dollars. This is well worth taking advantage of if you plan on selling right away for the 15% gain and diversifying the proceeds into your index funds in taxable. Again, remember your human capital is already tied up in this company, and they are doing your 401k match with company stock. So unloading the ESPP shares for the gain is well worth it.

What percentage of your income is available to contribute after tax to the ESPP and still be comfortable able to meet your household expenses? I would base it on that. If the number ends up being 5%, 10%, 15% or some number between - so be it. You already have 11% pre-tax going to the 401k. What percentage can you afford for the ESPP and get by comfort wise?
"Everywhere is within walking distance if you have the time." ~ Steven Wright

ryman554
Posts: 1172
Joined: Sun Jan 12, 2014 9:44 pm

Re: How much to contribute in Employee Stock Purchase Plan?

Post by ryman554 » Sun Apr 14, 2019 8:36 pm

CyclingDuo wrote:
Sun Apr 14, 2019 8:27 pm
What percentage of your income is available to contribute after tax to the ESPP and still be comfortable able to meet your household expenses? I would base it on that. If the number ends up being 5%, 10%, 15% or some number between - so be it. You already have 11% pre-tax going to the 401k. What percentage can you afford for the ESPP and get by comfort wise?
The answer to that question is "suck it up for 6 months". Then it doesn't matter, as long as the OP can budget properly.

Once the OP has 6 months of returns, ESPP is self-funding for the next tranch. I strongly advise the OP get on the train as soon as possible.

Post Reply