Why you should sell shares in your company immediately

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The writer is senior adviser at Engine AI and Investa, and former chief global equity strategist at Citigroup

I have enjoyed a long career in the financial advice business. So it’s no surprise that I’m often asked what is the best advice given to me. This came from a grizzled colleague many years ago: “Rob, when your employee stock vests, sell it immediately. Wait a week. If the only investment that you can think of putting all that cash back into is the same stock, then buy it back again.” When I thought of it like that, of course, I never bought back in.

Many publicly listed companies pay their more senior staff in deferred stock (and cash) that vests over some future period, say in equal portions over the next three years. Academics approve because turning employees into shareholders should reduce natural principal/agent tensions at a public company. Regulators like it for similar reasons. Indeed, remuneration deferral was embedded in regulations following the 2008 financial crisis. This was intended to reduce short-termism and moderate risk-taking among employees.

Corporates approve because it helps to lock in valuable employees, as they forfeit their unvested stock on departure. Compensating for this loss pushes up hiring costs for a potential competitor.

I get it. Creating employee shareholders gives us all skin in the game. But in a giant listed company with many thousands of employees, the number of executives with the power to make genuine business-critical decisions is tiny, perhaps 0.1 per cent (that’s 200 in a company of 200,000). The rest of us do our best, but we are share-price takers not makers. I understand the “act like an owner” exhortation, but it usually comes from the 0.1 per cent. To the other 99.9 per cent it can sound delusional.

This column isn’t meant to be a detailed discussion of the strengths or weaknesses of deferred pay structures. It’s about what regular employees should do when the deferral period ends and the stock vests. It always amazed me how many of my colleagues didn’t sell. Perhaps they thought they could get out at a higher price. Some did, but many didn’t. Maybe they were deterred by a potential capital gains tax liability. Or perhaps they were subject to what the behaviourists call the endowment effect, holding on to what they have because they were given it.

Of course, this is a very first-world issue. But these are people in the finance business, presumably well versed in the benefits of risk diversification. How could they continue holding a large chunk of their personal wealth in the equity of the company that employs them? If things go wrong, even through no fault of their own, they are at major risk of simultaneously losing their job and seeing their personal wealth hit by a collapse in their employer’s share price. That’s life-changing. I know, I’ve seen it happen.

Maybe the “sell immediately” strategy was right for me because I spent years working at a financial institution where share price performance has been poor. What if I was lucky enough to work at a big tech company where the share price kept rising? My non-selling colleagues would have got much richer than me. But the diversification argument still holds. Having all your eggs in one basket is always dangerous. And remember, even as you sell old vested stock, you are probably getting reloaded with new unvested stock, so still have plenty of investment exposure to your employer. Overall, I think the advice at the top of this column holds for any regular employee of a large listed company.

Share options are different, more of a free hit. Deferred remuneration paid in stock exposes you to downside if the stock falls before it vests, and afterwards if you don’t sell. Options can expire worthless, but no worse than that.

It makes sense for chief executive pay to be closely linked to share price performance. They, and the rest of the 0.1 per cent, should be paid heavily in stock. External shareholders ought to be suspicious if these senior executives are always sellers.

But, for the rest of us, diversifying exposure away from our employer makes cold financial sense. It may look 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 where the employees famously held 30 per cent of the shares. The CEO seriously disapproved of employees selling their (vested) stock. Following my grizzled colleague’s advice would have damaged the career prospects of anyone working there. The name of that company — Lehman Brothers.