5

Every second Friday, when an employer gives out paycheques to its employees, some employers also give company shares as part of every paycheque (ESOP).

Now, quite a few big employers with many many employees do this. I am assuming this means that every other Friday, the company is going into the open public market, buying those shares and then giving it out to the employees.

For companies with large number of employees, should this not automatically cause the share price to spike every other Friday because of this huge buying demand?

| improve this question | |
  • 3
    If the trade really happens this way, it's regular and therefore predictable. So shouldn't it already be almost entirely factored into Thursday's closing price? With a small allowance for the tiny risks that the company will fail to run payroll, or that all its employees opt out of ESOP at once. Or don't we believe in efficient markets? :-) But I don't know whether the trade does happen this way, hence not an answer. – Steve Jessop Feb 3 '15 at 23:28
  • Similar question about selling such stock every other Friday: money.stackexchange.com/questions/8918/… – Philip Feb 4 '15 at 4:19
  • You might just as well ask why the share price doesn't drop because it has to pay out cash in salaries every two weeks. The answer to both is the same; because the payment of cash and shares is a liability that already exists on Thursday. – Mike Scott Jun 14 '17 at 12:31
5

Let's take an example: IBM has about 430,000 employees worldwide. Assume the average yearly salary is $80K (it's probably less, since a lot of jobs are offshore). If every employee took 10% of their pay as stock, that's $132 million every two weeks. But IBM's market capitalization is about $153 billion, so stock purchases would be less than 0.1% of that.

| improve this answer | |
  • 1
    I would guess that thinking about whether it's going to spike the price, then comparing the purchase to typical daily volume is more significant than comparing it to cap. But that might be harder to estimate since it's more variable :-) – Steve Jessop Feb 3 '15 at 23:19
  • 1
    @Steve Jessop: Quite possibly so, but I was just doing a simple back-of-the-envelope calculation to get a sense of the scale. Feel free to edit my answer to add your own calculation. – jamesqf Feb 4 '15 at 3:20
11

This is an old question that has an accepted answer, but it has gotten bumped due to an edit and the answers given are incorrect.

I am assuming this means that every other Friday, the company is going into the open public market, buying those shares and then giving it out to the employees.

No. Companies will internally hold shares that it intends to offer employees as additional compensation. There are no open market transactions, so the market price of the stock does not change (at least not due to buying pressure). The only net effect is an equivalent expense for the compensation, but that should already be accounted for in the share price as normal operating expenses.

These share may come through an initial buyback from the market, but more common is that when companies issue new shares they keep some internally for exactly this situation. If they issued new shares every pay period, it would dilute the existing shares several times a quarter which would be difficult to account for.

| improve this answer | |
  • I do agree with your sentiment that even the accepted answer is deficient despite being clever. As a counter to it, IBM has 950M shares outstanding with a trading volume of 4.5M. So 0.48% of shares are traded; which means 0.1% extra in trading volume would cause a spike if they went to the open market. – Lan Jun 14 '17 at 14:42
  • 1
    I'm not sure the distinction between "issuing new shares" and "holding shares internally and offering them" is so substantial as to the impact on supply/demand. Both events change the total supply available on the market in the same manner. – Joe Jun 14 '17 at 14:43
  • @Lan but it's irrelevant. Stock provided through EPPs are not bought on the open market when they are given, so there is no impact (even a miniscule one) to the share price due to trading activity. – D Stanley Jun 14 '17 at 14:44
  • 1
    @Joe, I think DStanley is pointing out that there would be no sudden open market event on payroll day. Share repurchases can happen over time, new shares can be issued over time; so while the distributions are predictable, the acquisition or creation of the shares is not. – quid Jun 14 '17 at 16:48
  • 2
    @Joe yes they have the same denominator, but both are irrelevant to the question. No new shares are "issued" and no shares are "traded" when they are given as compensation, so trading volume is not relevant. The onwership of the shares just changes from the company to the employee. – D Stanley Jun 14 '17 at 18:28
8

Many companies actually just issue new shares for employee compensation instead of buying back existing ones. So actually, the share price should go down because the same value is now diluted over more shares.

In addition, this would not necessarily affect companies with many employees than those with fewer employees because companies with more employees tend to be bigger and thus have more shares (among which the change in demand would be distributed).

Also, I think many companies do not issue shares to employees every pay day, but just e.g. once every quarter.

| improve this answer | |
  • A lot of companies have share purchase plans, where a part of the salary is deducted and you get twice the value in shares that you spend in cash from your salary. – barq Feb 3 '15 at 15:46
3

Pre-Enron many companies forced the 401K match to be in company shares. That is no longer allowed becasue of changes in the law. Therefore most employees have only a small minority of their retirement savings in company shares. I know the ESOP and 401K aren't the same, but in my company every year the number of participants in the company stock purchase program decreases.

The small number of participants and the small portion of their new retirement funds being in company shares would mean this spike in volume would be very small.

The ESOP plan for my employer takes money each paycheck, then purchases the shares once a quarter. This delay would allow them to manage the purchases better. I know with a previous employer most ESOP participants only held the shares for the minimum time, thus providing a steady steam of shares being sold.

| improve this answer | |
  • In the US, due to recent changes, ESPP/ESOP became increasingly useless. You could make quite a buck on it until the changes, but know your profits are very limited and many people just don't bother. – littleadv Feb 3 '15 at 16:44
  • 2
    Thanks. Why do you call them useless? Can you elaborate please? – Victor123 Feb 3 '15 at 16:52

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.