It’s one thing to love your employer. It’s a whole other thing to love your employer’s stock.
Let’s rewind the clock and go back to the eve of the new millennium. It’s New Year’s Eve 1999 and you don’t have the benefit of knowing what the next two decades will hold for you, your employer or your employer stock. If you had to pick one blue chip company to be an executive at and have all your executive stock compensation tied to, many would have chosen GE.
While GE may be only a shell of what it once was, at the time you would have been hard pressed to choose a better single company as a “safe” bet to link your financial future to than GE. With Jack Welch at the helm, a man widely regarded as the CEO of the century, GE was a global conglomerate dominating in essentially every business it entered. Welch’s rule to be either #1 or #2 in a category or get out of the business was propelling growth and powering shareholder returns. Just look at this Yahoo! Finance chart showing GE’s share price more than doubling S&P 500 returns throughout the 1990’s:
With a stock price movement like this, it’s common for executives to build an emotional affinity for their employer’s stock. With substantial wealth created through employee stock options, continuously strengthening “love” from the markets and what looks to be a bright future for a diversified global powerhouse, what’s not to love? Sure, there were higher fliers in the decade like JDS Uniphase and AOL, but GE was an original Dow stock with heritage, great leadership and a bright horizon. So, as far as a blue chip to build executive wealth it's easy to see the appeal.
Fast forward to today, and you can quickly identify companies that appear to fit this same mold. Fantastic performance, strong global businesses and rabid employee culture fueled by vast amounts of employer stock wealth. Here’s the issue with all of this: Research shows that the absence of fear causes you to underestimate risk while conversely the existence of fear can cause you to overestimate risk. A perfect example of this is when a person chooses to drive to a destination due to a fear of flying, even when statistics show that car ride to be the more dangerous route. As past stock performance skews an executive’s perception of risk, their continued and increasing single stock exposure is masked by this “lower” risk perception and becomes an increased danger to long-term financial security.
"I get it and if you're there then you get it too."
And none of this is merely hypothetical or academic. I’ve seen it. I’ve worked with everything from the new hot IPO employee with millions in freshly minted wealth to the long-time executive hoarding the stock of the employer they’ve worked for over 40 years. They’ve been lulled into a sense of lower risk by “knowing” their company and often overlook the immense risk of single stock exposure. I get it and if you’re there then you get it too.
As we move forward into the early 2000’s, we see how the dynamics of a company, and also markets as a whole, shifted. With Jack Welch’s retirement and the attacks of September 11, both GE and the markets changed and with it, the performance of GE stock. Throughout this period, an executive’s wealth could be shattered quickly as stock option values head under water. Protracted challenging markets and a business model hammered by the financial crisis had GE’s stock price in what felt to be freefall while immense amounts of executive wealth, and with-it financial security, was erased from existence.
The decade to follow and up through 2018 continued to be challenging for GE shareholders. While roughly keeping pace with the S&P, 2017 was a fantastic year for the market while GE’s stock price, and executive compensation, was hammered. This decade has seen GE removed from the Dow Industrial Average as it fights for its future as a relevant conglomerate in a world of increased corporate specialization.
As they say, hindsight is 20/20. It’s easy now to look backwards and say “could have”, “should have” and “would have”. While stock options and executive compensation are fantastic tools for building substantial wealth, they can just as easily devastate a once secure financial future. So what are you doing now to ensure you capture value in your stock compensation programs? Loving your employer is great but be rational in considering how to manage your employer stock. How to manage non-qualified stock options (NQO) is particularly critical due to the fact that you will have a limited time to exercise your grants and you will lose all value if stock price goes below the grant price.
There are plenty of great reasons to maintain or even grow your investment in your employer stock. Don’t let love blind your decision making or risk your family’s future. Have a plan and verify that plan with an experienced executive advisor to strengthen your decision making.
If you’d like to learn more about how to manage employee stock options, ESPP plans, or deferred compensation plans, give us a call at 860-264-1111. We'd love to tell you about our 10Ex Executive Wealth Audit. Thank you!
Spurstone is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.