How to Approach Selling Stock Compensation in Your Public Company
The effects of psychological barriers and biases on investment decisions are well documented, yet still they often manage to be amplified when dealing with stock positions in an individual’s own company. Even investors who would normally consider holding a single stock foolish sometimes have a blind spot for their own equity compensation. Further compounding this is the investment axiom that broad and diversified equity portfolios increase to reflect long-term fundamental economic growth does not hold true in the case of a publicly traded individual company stock. Risks to the company management, from competition, lack of innovation, and even just bad luck can cause the company to deviate in performance even while the rest of the economy may be growing.
A classic example looks very much like target fixation, where an investor takes note of the high price their company stock achieved, even if it was only briefly. Maybe this price is discussed around the office or in a company email. Should the price drop, there’s a tendency to believe that the rest of the market is also aware of the high and owes a recovery to that price. Loss aversion takes hold and the investor can’t bring them to sell until that price occurs again.
Oftentimes, the simplest and most effective way to reduce portfolio risk and make progress towards accomplishing financial goals is to simply have a regimented plan for selling concentrated positions. Unfortunately, selling a stock in a company you currently or previously worked for can be a perfect storm of triggering emotional and psychological biases.
To name a few of these most common biases:
| Bias | Description | Practical Example of the Effects |
| Overconfidence | A tendency to overestimate or exaggerate the ability to succeed at a task | As an employee has insider knowledge of the company, they overrate their abilities and overvalue the company stock. |
| Endowment | Assigning a disproportionate value to assets already owned versus purchasing them | When an employee desires to continue to hold a stock position, despite the fact that if they were given equivalent cash, they wouldn’t choose to buy the position. |
| Status Quo | More choices and information often produce greater indecision | People often avoid making changes in favor of keeping things the same. In science this principle is called inertia. |
| Home Country | A tendency to favor companies in your own country over those from others | With any stock concentration there is already a battle towards diversification. It’s easy to compound this struggle further by overallocating to one country. |
As always with biases, one of the best ways to combat them is through awareness. A consistent focus on your financial goals and making progress towards achieving them is often the best approach. Systematically asking questions that test your motivations is a great way to maintain this focus.
Here are some types of questions you can ask when strategizing for your company equity positions:
| What? |
| What is your primary objective for these assets? What is your outlook for your company stock – and importantly, why? What would be more upsetting: selling a security that continues to rise, or holding one that continues to fall? |
| How? |
| How do you see your role in your company changing? How will these assets be used in your financial plan (retirement, goal funding, charitable)? How are you planning your exit strategy for these positions? |
| What if? |
| If you didn’t work at your current company, how much of the stock would you own in your portfolio? If you were presented with cash equal to the value of your current position, how much of your company stock would you buy? If you have changes to your career, how might that affect your tax situation in the future? |
Having a trusted advisor as a sounding board and accountability partner is an excellent approach to tackling these questions, formulating a plan, and implementing it to achieve your goals.
Dann Ryan is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.