Would you enroll in this ESPP? 6 months required holding period

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Bungo
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Would you enroll in this ESPP? 6 months required holding period

Post by Bungo » Tue Feb 23, 2016 6:04 pm

My employer was recently acquired by another company, and the terms of the new ESPP are not nearly as nice as the old one.

Old plan:
  • * Stock purchased every six months, eligible to sell more or less immediately
    * Purchase price is 15% below the minimum of the stock price on the purchase date, or the previous four purchase dates. In other words, purchase price remains "sticky" for two years if the stock price goes up, and resets lower if the stock price goes down.
    * Can contribute up to 15% of salary + bonus, up to $25/year maximum
New plan:
  • * Stock purchased every six months, but must hold the stock for six months after purchase
    * Purchase price is 15% below the minimum of the stock price on the purchase date, or the previous purchase date six months ago. No two-year window.
    * Can contribute up to 15% of base salary only, up to $25k/year.
The old plan was great - a return of 15% (with an average holding period of 3 months) was practically guaranteed, and often the return was significantly higher due to the two year window which, for example, froze the purchase price from 2009-2011.

The new plan seems quite bad. The lack of a two-year window and the lower maximum contribution (since bonuses are excluded) are unfortunate, but the six month required holding period seems like a show-stopper to me. Instead of a more or less guaranteed 15% minimum return, it's now an opportunity to gamble that the stock price will not be lower six months after purchase. I wouldn't take that bet with any other investment, and the 15% discount doesn't seem like sufficient compensation for assuming this significant risk.

Am I missing anything? If you think such a plan is worth enrolling in, I'd like to hear why.

danaht
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by danaht » Tue Feb 23, 2016 6:46 pm

New tax rules are making ESPPs less appealing. You have to be careful when filling out your taxes - because it's very easy to get double taxed with this situation. I would be more likely to participate if a discount was 20% or more- this would help offset dealing with the new tax requirements.
Last edited by danaht on Wed Feb 24, 2016 3:29 pm, edited 1 time in total.

Bob's not my name
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bob's not my name » Tue Feb 23, 2016 6:50 pm

17.6% return, not 15%. 15/85 = 17.6%.

You are right that the six-month holding period makes it far less attractive, but still attractive, I'd say. If the stock is eternally flat, the annualized return with no holding period is 91%, but only 24% with the holding period (since a 3-month investment is now a 9-month). But 24% is still spectacular. You also still have a lookback provision, which makes it more attractive.

The holding period may cause you to lose sometimes, but on average you should win. Just be sure to dump each lot at the first opportunity, so you don't accumulate too much, so your annualized yield is maximized, and so your risk window is minimized.

A 17.6% average return on 15% of salary is a 2.6% annual bonus, which is pretty good. The fact that it's taxed as ordinary income shouldn't deter you -- most bonuses are taxed as ordinary income.
Last edited by Bob's not my name on Tue Feb 23, 2016 7:26 pm, edited 1 time in total.

Bob's not my name
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bob's not my name » Tue Feb 23, 2016 6:51 pm

danaht wrote:A couple years ago that 15% gain would have been taxed as a long term capital gain if held for more than 1 year.
I don't know if that was ever the case, but it wasn't the case 15 years ago.

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aj76er
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by aj76er » Tue Feb 23, 2016 7:07 pm

If I wasn't able to dump the stock immediately and lock in the gain, then I wouldn't do it.
This last ESPP period for me (in late Dec), I was able to do a same-day sale and take my 15%. A few weeks later, the entire market tanked.

If it were me, I'd just invest that 10% periodically into VTSAX or something else more diversified. Be thankful you had a nice run at a 2yr lookback; The last time I had that was 2001-2004 :).
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Wagnerjb
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Wagnerjb » Tue Feb 23, 2016 9:20 pm

Bungo wrote: Instead of a more or less guaranteed 15% minimum return, it's now an opportunity to gamble that the stock price will not be lower six months after purchase. I wouldn't take that bet with any other investment
Sure you do. You take that bet every time you invest in an equity mutual fund.

If you are willing to take that bet with an equity mutual fund - buying at today's price - how would you feel if I gave you a 15% discount to today's price?

Seems like free money to me.

Best wishes.
Andy

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jimmyq
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by jimmyq » Tue Feb 23, 2016 9:44 pm

I would (and have) enrolled in an ESPP like that (15% discount and 6 month holding period). The company I worked for at the time was large and stable, and I may have had second thoughts if it was a small company with a questionable future. I dropped out of the program when the company decided to drop their match from 15% to 5%.

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Bungo
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bungo » Tue Feb 23, 2016 10:23 pm

Wagnerjb wrote:
Bungo wrote: Instead of a more or less guaranteed 15% minimum return, it's now an opportunity to gamble that the stock price will not be lower six months after purchase. I wouldn't take that bet with any other investment
Sure you do. You take that bet every time you invest in an equity mutual fund.

If you are willing to take that bet with an equity mutual fund - buying at today's price - how would you feel if I gave you a 15% discount to today's price?

Seems like free money to me.
Sorry, I should have said that I wouldn't take that bet with any other individual stock. I don't want to hold individual stocks, least of all my employer's stock. With the old plan, I didn't have to hold it. With the new one, I would have to hold it for at least six months.

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unclescrooge
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by unclescrooge » Tue Feb 23, 2016 10:30 pm

I was in the same boat as the OP. I chose to not participate, as did a majority of the employees of the acquired company. We also complained about it, and 6 months later they lifted the 6 month holding restriction.

Wagnerjb
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Wagnerjb » Tue Feb 23, 2016 11:08 pm

Bungo wrote: Sorry, I should have said that I wouldn't take that bet with any other individual stock. I don't want to hold individual stocks, least of all my employer's stock. With the old plan, I didn't have to hold it. With the new one, I would have to hold it for at least six months.
Here is how I look at it:

a) If you invest the max 15% of salary in this ESPP, you will only ever have 7.5% of your salary exposed to this individual stock risk.

b) If you are young, you can expect to "roll the dice" with your employer stock dozens of times, so you are getting a form of time diversification. You might have one or two six month periods where your stock drops more than 15%, but you should expect to win the vast majority of the time (when you begin with a 15% discount).

c) If you are older, the amount at risk (representing 7.5% of salary) might only represent 2-3% of your net worth. With the stakes being so small, why not roll the dice when you get a 15% head start?

Best wishes.
Andy

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Watty
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Watty » Wed Feb 24, 2016 12:11 am

What it was before really does not factor in the decision to do it now or not.
Bungo wrote:* Stock purchased every six months, but must hold the stock for six months after purchase
After you have been in the plan for a year then every six months you will be eligible to sell the prior periods stock so you will still be guaranteed a 15% return. The downside is that in effect you will have to always have 7.5% of a year's salary in the company stock.

For example if you make $100K then it could work like this;

January buy $7,500 in stock (lot A)
July Buy $7,500 in stock(lot B), and sell Lot A - That will give you at least a 15% net gain or about $1,000
Next January Buy $7,500 in stock(lot C) sell Lot B. - That will give you at least a 15% net gain or about $1,000

Very roughly the worst case is that you will get about $2,000 a year for keeping $7,500 investing in the company stock which is about a 26% gain, in the worst case. If the stock goes up during the six month periods that would result in a larger gain.

That is well worth doing.

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Bungo
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bungo » Wed Feb 24, 2016 1:22 am

Watty wrote: For example if you make $100K then it could work like this;

January buy $7,500 in stock (lot A)
July Buy $7,500 in stock(lot B), and sell Lot A - That will give you at least a 15% net gain or about $1,000
Next January Buy $7,500 in stock(lot C) sell Lot B. - That will give you at least a 15% net gain or about $1,000
Thanks for this analysis. I hadn't thought about it this way. However, I'm still not convinced that I would be certain to come out ahead. It the stock drops by more than 15% in a given six month period, I lose money when I sell the previous batch of shares. Granted, the new shares will be purchased at a lower basis price, but maybe the stock keeps dropping year after year...sometimes they do that. Then there's the problem of the final six-month period. Any loss I take in that period will not be offset by another, cheaper purchase.

FYI, to address the comment about how many times I will be able to "roll the dice" with this plan, I'm 47 and would like to retire at around 55, probably remaining at this company until then, although nothing is certain. It's true that I will only have 7.5% of my salary at risk at any one time, and that is a small part of my net worth, but I could cumulatively lose more than that over a period of years, by taking many smaller losses.

I might feel more comfortable rolling these dice if I was buying a broad index fund at a 15% discount, but an individual stock can behave a lot more badly that the index overall.

On the bright side, the new 401(k) plan will include a 6% match! We haven't switched over yet, so I haven't seen the fund selection.

Bob's not my name
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bob's not my name » Wed Feb 24, 2016 4:18 am

Bungo wrote:maybe the stock keeps dropping year after year
Two factors are often overlooked by employees with an ESPP opportunity:
1. If your company's stock is going monotonically downward, you have a bigger issue than your little stock loss. You need a new job.
2. Your company's performance relative to the overall market is the incremental risk. If the market does down, you would have lost money in an index fund, too.

Jack FFR1846
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Jack FFR1846 » Wed Feb 24, 2016 7:22 am

I would skip it. My ESPP is similar but has no holding period, which is normal for the industry.

Why would I skip it? I was in a big, stable company some years ago and enrolled in the ESPP, but assumed I missed the window. I didn't miss the window, so bought at 48. I left the company shortly after the buy, not even knowing that I bought. I was only alerted when a statement came showing the shares. Less than a year later, I'm selling at......12. I was not amused. Stock prices can go down in 6 months and there's nothing you can do about it.
Bogle: Smart Beta is stupid

traveltoomuch
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by traveltoomuch » Wed Feb 24, 2016 9:41 am

I would participate, but only up to ~5% of other stock investments. I don't have hard statistics behind that, but it is my gut instinct for level of tolerable risk.

I have put money into an even-more-locked-up ESPP, and I lost money. The holding period included a market downturn, so I would have expected to lose some, but I lost even more than the overall market. And I had to pay taxes at income rates on the initial discount.

How much single-company stock are you willing to hold generally? And how much of your employer's stock are you willing to hold, nevermind the ESPP discount? Let those answers guide you.

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Watty
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Watty » Wed Feb 24, 2016 10:27 am

Bungo wrote:Thanks for this analysis. I hadn't thought about it this way. However, I'm still not convinced that I would be certain to come out ahead. It the stock drops by more than 15% in a given six month period, I lose money when I sell the previous batch of shares. Granted, the new shares will be purchased at a lower basis price, but maybe the stock keeps dropping year after year...sometimes they do that. Then there's the problem of the final six-month period. Any loss I take in that period will not be offset by another, cheaper purchase.
Those were all the worst case numbers but in the above example you would be clearing $2,000 a year if your salary is $100K. If you stay with the company for four years that would be $8,000 which would cover your initial $7,500 investment if the stock went to zero.(This ignores taxes and pay increases.)

Unless you are there less than four years it is pretty much risk free.

Just by random chance then will also likely be many six months periods where the stock price increases and you will not only get the stock at more than a 15% discount since you buy it at the lower beginning price.

You prior plan was absurdly good and may have been overly generous in order to lock people in there until the company could be sold. I'm not good at accounting but I would suspect that the compensation was given that way so that the employee pay numbers would look better in order to make the company more attractive to sell.

If this was a high tech company then you may find that it will be more difficult to find another job with lots of stock options and purchase plans like that. The high tech companies often go through cycles where these are worth a lot and then dry spells they may issue options that end up worthless. My impression is that this cycle has already peaked unless you are in upper management. Even if you have gotten these for several years now it would be good to base your budget on just your salary. Many people have gotten into trouble by depending on stock options and bonuses that suddenly stop.

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Bungo
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by Bungo » Wed Mar 02, 2016 5:23 pm

Thanks to all who commented. I have decided not to participate. There are some indications that enrollment is far lower than the company expected: they have extended the enrollment deadline, and I've heard some hallway rumors. So there is reason to hope that they will improve the terms at some point in the future.

inbox788
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Re: Would you enroll in this ESPP? 6 months required holding period

Post by inbox788 » Fri Mar 04, 2016 5:43 pm

Bungo wrote:Thanks to all who commented. I have decided not to participate. There are some indications that enrollment is far lower than the company expected: they have extended the enrollment deadline, and I've heard some hallway rumors. So there is reason to hope that they will improve the terms at some point in the future.
I'd suggest you reconsider, IMO, the benefits outweigh the risks. It's less lucrative than before, but I think if you stick around a few year, you're going to regret not doing it.

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