How Much is Too Much When It Comes to Owning Stock in the Company You Work For?

For many executives and senior level managers, compensation comes in the form of a set salary, a cash bonus (or two), and some form of equity ownership in the company. For executives and senior managers of publicly traded companies, equity ownership typically comes in the form of company stock.

Publicly traded companies offer senior leaders multiple ways to own shares of stock in the company. Whether through a Stock Purchase Plan (SPP), Incentive Stock Options (ISOs), Restricted Stock Units (RSUs), or an Employee Stock Ownership Plan (ESOP), executives and senior managers are enabled to invest in and purchase company stock at a discounted price. Though these may all be held in different accounts — sometimes with varying tax treatments — they should still be considered in aggregate as a part of an overall investment portfolio.

Oftentimes, one’s natural instinct is to accumulate as much stock in the company, while still an employee, as possible. After all, the stock market seems to always go up eventually, correct? And what better company to invest in than the one you know the most about, right? While this can frequently be a great way to invest in the stock market, as an investor, always question whether it is a good idea to load up on too much of any one company’s stock.

Just ask Dick Fuld. Remember him? He happens to be the former CEO of Lehman Brothers who famously held 85% of his total net worth in the company’s stock when the firm filed for bankruptcy following the 2008 financial crisis. Notably, 30% of Lehman Brothers’ outstanding shares were said to have been held by their own employees. That means that several senior managers and executives, who were not as well-off as Fuld, were left holding company stock worth less than the value of the paper it was printed on in the end. While this may be an extreme case, it is nonetheless a cautionary tale worth heeding.

Investing in one’s own employer is often a good idea, especially if employees can buy shares at a discount. However, it is imperative to set some guidelines and parameters to “diversify” investment holdings. For example, consider diversifying among different industry sectors, not just those of the company to which you belong. Oftentimes when bad news hits one stock in an industry, it can also have a similar impact on other companies within the same sector. That is doubly true for the healthcare and tech industries, which are among the most volatile. Although diversification neither ensures a profit nor eliminates the risk of loss, doing so may help reduce the effects of price fluctuations that will undoubtedly occur in any investment portfolio over time.

Keep in mind that owning too much of any single stock is rarely a good idea. Choosing to demonstrate confidence in a company’s prospects for success and wanting to remain loyal to the team are admirable; however, recognize that that these choices present additional risks if an investor fails to diversify. Nonetheless, if the intention is to remain loyal to the rest of the company, capping total exposure at 25% is a viable option. At that level, an investor is exposed to the assumed upside, or any potential increase, while protecting themselves against enough of any unforeseen downside.

Upon review and evaluation of investment objectives, investors may realize that they hold a “concentrated position” (i.e., possessing too many holdings in a single stock or being heavily invested in a single industry sector). A highly concentrated stock position significantly exposes the investor to the fortunes (or misfortunes) of a single company. If this is the case, it is a good idea to contact a Financial Advisor and discuss strategies for reducing concentrated holdings. There are a variety of strategies that can help reduce the risks involved in having concentrated positions in both taxable and tax-deferred accounts; regardless of your status as an insider.

In addition to company stock, senior leaders should explore broadening equity holdings to include exchange funds, index funds, or mutual funds with sufficient exposure to sectors and industries that are outside of your own. Strive to maintain a balanced asset allocation with stocks not only in different industries, but also bonds and other non-correlated investment vehicles as well. Be mindful that investment in stocks will fluctuate in value, and when sold, might be worth more or less than the original investment. 

Well-established investment objectives and one’s own risk tolerance and time horizon will dictate the appropriate asset mix for their financial situation. Because each investor has different investment needs, seeking professional assistance is usually the best alternative to avoid the risk of concentrating all eggs in one proverbial basket.

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Malcolm Ethridge, CFP?, CRPC? is an Executive Vice President and fiduciary Financial Advisor with CIC Wealth, based in the Washington, DC area. Malcolm’s areas of expertise include retirement planning, executive benefits, investment portfolio development, and insurance.

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Disclosures:

CIC Wealth, LLC does not provide legal or tax advice. Be sure to consult with your tax and legal advisors before taking any action that could have tax consequences.

Investments in securities and insurance products are: NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE