It is trickier to earn an almost guaranteed profit from the Employee Stock Purchase Plans (ESPP) usually offered by Canadian companies. In a typical plan, the employee contributes a set percentage of base pay (say 2%), which is matched partly or fully by the employer and the total proceeds are used to purchase company stock at market value once during every pay period. This flavour of ESPPs differ from those offered by US-based companies in two ways:

  1. Stock is purchased regularly. If you are paid bi-weekly, for example, company stock is purchased 26 times every year.
  2. The percentage of contribution is lower (typically 2%-5% of base salary) but the company match is higher (typically 100%).

The first step in profiting from these plans is to figure out how much company stock you should hold. Personally, since my pay check already depends on the financial health of my employer, I would limit exposure to my company stock to 5% of our total portfolio. The exact percentage depends on your personal circumstances but you should be cautious about overloading on company stock. It is natural to feel confident about your employer but risky to have too much of your portfolio riding on the same place your pay check comes from.

My spouse participated in this variety of ESPPs with a previous employer and we had strict rules on the account: the total value of the company stock could not exceed 5% of our total portfolio and if the stock trades at 20% less than our average cost base, we would sell immediately. It turned out that the stock treaded water for about three years and when it went up about 25% from our ACB, we cashed in. I don’t have a good reason for selling except that I had no idea how to value the company and it seemed prudent to bank the profits.

This article has 11 comments

  1. My ESOP (Employee Share Ownership Program) – which is just another term for the same thing – is with a major bank in Canada – so I am comfortable owning more than 5% in my own portfolio.

    I remember when one of my colleagues first chatted with me when I started mentioned that I should hold it in a non-registered account and when shares vest immediately transfer them to a personal non-registered account with margin and apply the margin to it as it becomes available. Some of the guys showed me their plan values – and it sure made sense! :)

    But if you like buying stock with no commissions, you can setup an DSPP (Direct Stock Purchase Plan) with a bunch of blue chip public companies in Canada and the US. It’s like having a Employee Share Ownership Program without being an employee (and of course there is no matching).

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  3. I do have a ESPP plan at work and I use it to the maximum (8% of my paycheck). It is matched by a 25% contribution from my employer. I don’t really mind about the weight of this stock in my portfolio (it is definitely overweighted!) because this plan allows me to withdraw my shares twice a year.

    Then, I cash in my 25% (profit) on a yearly base. I highly doubt that the stock could drop more than 25% in a single year (it is also a major bank). If your company is matching as high as 100% of you contribution, what is the risk of overweighting your portfolio? I mean, where can you find a better investment over a 1 yr period?

  4. Canadian Capitalist

    I suppose the key is figuring out how much company stock you should hold. I chose 5% because my wife was working for a tech. company which is a lot more aggressive holding than a bank.

  5. Nortel had two flavours of these: the registered and unregistered.
    1) Nortel would match employees’ RRSP contributions in NT stock.
    2) We had the opportunity to purchase NT stock at a discount once every quarter (I think they took the money every paycheque and pooled it until stock was purchased).

    From a corporate perspective it seems like a great way to promote your own stock.

    The discounted stock was a bad idea, since it was a taxable benefit at full rate whereas any capital gain would not have been taxed at the full rate. I’d heard about JDS employees who bought stock at huge discounts (and thus large tax bills), then watched the stock tank. Thus they were left with big tax bills but enjoyed no profit.

    In the end, drawing a paycheque and investing in the same company puts yourself at higher risk.

  6. I totally agree with the Wealthy Canadian’s comment; do you really want to have your paycheque and investments coming from the same egg?

  7. Canadian Capitalist

    I disagree that buying discounted stock is a bad idea. It depends on the discount (50% is less riskier than 15%), the employer (a bank is more stable than a young tech company) and your risk tolerance (Personally, I won’t want more than a 5% exposure to employee stock). I used to work for a volatile high tech company but I always profited from the US-style ESPP because I sold the shares immediately. The way I see it, do you have any place else where you can get a minimum 17% return. Yes, it is fully taxable but even if you are in a 50% bracket, it is still a very good rate of return.

  8. Interesting to see how different companies operate. At ours we get a 15% discount to the stock price. This is calculated by setting the ESPP plan from Oct 1 of the present year to Sept 30 of the following year. The deductions are every paycheque based on the stock price on Oct1. If at the end of the year the stock price is lower on Sept. 30 than the previous year we get them at that price minus the 15%, and our excess contributions are returned to us in cash. We can also contribute up to 10% of our base salary (I only do about 3%). At the end of the plan year our shares are deposited directly into an ETrade account the company set up for us, so the only commision you have to pay is the fee when you sell them ($29.00). I have a trading account with TD so I set up an account transfer on ETrade so I can transfer the money from the stocks directly to TD. There is also some calculations and locked in exchange rates since the stock trades in the US. This is a US based oil servicing company.

  9. Dave: The ESPP program at my employer works exactly like yours. I covered it in an earlier post.

    Link

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