ESOP Opportunity Cost: Too good to be true?
Hello,
I am looking for the forums perspective on my employers ESOP proposition and the associated opportunity cost as it relates to staying at the company for ~30 years to receive a BIG payout upon retirement.
My question to the forum is this: If I could change jobs today and increase my base salary by 10-20%, wouldn't that be worth far more over the next 30 years than waiting for an ESOP distribution 30 years in the future when I retire with a annual COL increase of 3%?
1) My employer is a 100% employee owned ESOP company. They contribute 17% of my base salary each year to the ESOP program on my behalf (5 year vesting schedule). Great place to work.
2) I received the ESOP koolaid which included some incredible charts and graphs showing the incredible growth in value of the ESOP since its inception ~20 yrs ago. The average ten year return since inception is around 14%. The graphs and charts make it appear as if you can retire as a multimillionaire with 22MM after staying at the company for ~30 years. This seemed to good to be true. Since this 22MM value appeared too good to be true I met with a financial advisor and they did confirm that the graphs in the literature were future values and did not take into account inflation.
The reason I am so interested in figuring out the above question is because we are currently in a HCOL city where my + my wife's base salary will not afford us the ability to buy a home close to my current office based on our career salary ranges for our industries. We have two choices:
1) Relocate to company office in undesirable MCOL city (A) where we can afford to buy a home and stay with this company for the long haul (~30 years) to cash in on ESOP.
2) Find another job with a competitor (which pays 10-20% more) in MCOL city (B) where we can afford to buy a house, live near family and invest in rental properties on the side.
My thinking, given my basic understanding of NPV is that its far better to have more money today than it is to have the promise of more money in the future. In my mind I consider staying at a company for 30 years to cash in an ESOP an investment of my time with associated opportunity costs (limited desirable office locations etc.) that is inherent in the ESOPs value proposition.
-Posted to AM forum as I understand AM's focus their efforts on evaluating investment opportunities (in this case my time at a company). Let me know if another forum would be better suited to this discussion or if a specific financial professional CFP vs. CFA would be a good resource for evaluating this decision.
Thanks for your thoughts in advance.
thebrofessor
After reading through many of your posts I would be interested to hear your thoughts on my question above.
Thanks
tell me more about what type of firm it is, how you get paid out at retirement, and if it's all tax deferred (e.g. like a pretax IRA/401k)
the 10y return of SPY is ~16.5% so it's actually inferior to the stock market, but anything looks good with a double digit CAGR given enough time
if it's as simple as that - an illiquid option that doesn't offer world beating returns versus not, I take liquidity 10 out of 10x
thebrofessor
I appreciate your straightforward comments as finance is not my first language. Thanks!
Company: General Contractor
Form of payment: 1) Direct rollover to qualified retirement plan/IRA OR 2) Cash payment, subject to 20% withholding for federal income taxes, applicable
taxes and early withdrawal penalty (if under age 59 ½).
Timing of payment: 1) Lump sum OR 2) Equal payments over 5 year period (companies discretion between the two)
Taxation: All ESOP contributions from the company grow tax free until distribution due to ESOP being qualified retirement plan.
ESOP diversification option at age 55
yeah it could be good or it could be very underwhelming, single stock risk is huge. if you have another opp, I wouldn't stay just because of an ESOP. I'd rather have them pay me more and I'll just put that cash in the market
I worked for a similar firm in a past life and always thought it was silly, you’re pegging both your ability to afford day to day expenses, and your retirement to 1 stock. Huge firm specific risk and the exact opposite of diversification.
Now for the pipe fitter who makes his way up to a cushy office job it’s bad ass compared to lateraling to be a pipe fitter for an extra $5 an hour. Sounds like you have a more educated world view than that though.
Another thing that gave me pause was the returns that were advertised. And going through interviews for some valuation consultant type companies, where they pretty bluntly told me “ya if it’s a court splitting up a company because of owners getting a divorce 3-5x ebitda, if it’s a valuation of an esop, you kind of just tell them a number that’s a little better than last year”. In my case returns were advertised as being VERY HIGH, and you just kind of scratch your head and have to ask “should our equity really be appreciating at a rate that’s better than Amazon because we build things?”
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