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FT editor Roula Khalaf selects her favourite stories in this weekly newsletter.
The author is a senior advisor at Engine AI and Investa, and former chief global equity strategist at Citigroup.
I’ve enjoyed a long career in the financial advisory industry, so it’s no surprise that I’m often asked what the best piece of advice I’ve ever been given is. This advice came from a grey-haired colleague many years ago: “Rob, when your employees’ stocks come due, sell them immediately. Wait a week. If the only investment you can think of to put all that money into is the stock itself, then buy it back.” When I thought about it like that, of course, I never bought back.
Many publicly traded companies pay their senior staff with deferred shares (and cash) that vest over a future period, say in equal portions over the next three years. Academics approve of this move because turning employees into shareholders should reduce the natural tensions between principal and agent in a publicly traded company. Regulators like it for similar reasons. Indeed, deferred pay was built into regulations following the 2008 financial crisis with the aim of reducing short-termism and moderating risk-taking among employees.
Companies approve of this because it helps them retain valuable employees, as they lose the shares they had not acquired when they leave. Making up for this loss increases hiring costs for a potential competitor.
I get it. Creating employee shareholders allows us all to have skin in the game. But in a giant publicly traded company with thousands of employees, the number of executives with the power to make genuine, business-critical decisions is minuscule — maybe 0.1 percent (that’s 200 in a company of 200,000). The rest of us do the best we can, but we’re share price takers, not creators. I understand the exhortation to “act like an owner,” but it usually comes from the 0.1 percent. To the other 99.9 percent it may sound delusional.
This column is not intended to be a detailed analysis of the strengths or weaknesses of deferred payment structures. It is about what regular employees must do when the deferral period ends and the shares vest. I was always surprised by the number of colleagues who did not sell their shares. Maybe they thought they could get out at a higher price. Some did, but many did not. Maybe they were deterred by a potential capital gains tax liability. Or maybe they were subject to what behavioralists call the endowment effect, holding on to what they have because it was given to them.
Of course, this is a very first-world problem, but these are people who work in the financial sector and who presumably know well the benefits of risk diversification. How could they continue to keep a large part of their personal wealth in the capital of the company that employs them? If things go wrong, even through no fault of their own, they run a huge risk of simultaneously losing their job and seeing their personal wealth affected by the collapse of their company’s share price. That’s life-changing. I know, I’ve seen it happen.
Maybe the “sell immediately” strategy was the right one for me, because I worked for years at a financial institution where stock performance was poor. What if I had been lucky enough to work at a big tech company where the stock price kept going up? My colleagues who didn’t sell would have been much richer than me. But the diversification argument still holds. Having all your eggs in one basket is always dangerous. And remember that even when you sell old, vested stock, you’re probably re-acquiring new, unvested stock, so you still have a lot of exposure to your employer’s investment. Overall, I think the advice at the beginning of this column holds true for any regular employee of a large, publicly traded company.
Stock options are different, more of a free ride. Deferred compensation paid in stock exposes you to a loss if the stock falls before it vests and then if you don’t sell it. Options can expire worthless, but it’s not worse than that.
It makes sense that top executives’ compensation is closely tied to stock price performance. They, and the rest of the 0.1 percent, should be paid a lot of stock. Outside shareholders should be suspicious if these top executives are always sellouts.
But for the rest of us, diversifying exposure beyond our employer makes cold financial sense. It may seem cynical. It may draw disapproval from senior management, regulators or more loyal colleagues. It may even worry investors. So be it.
There is one company in which employees owned 30 percent of the shares, as is well known. The CEO seriously disapproved of employees selling their (acquired) shares. Following my gray-haired colleague’s advice would have damaged the career prospects of anyone working there. The name of that company: Lehman Brothers.