The Final Verdict: ESPP Part 3 – Employee: 0, Company: 1

In Employee Stock Purchase Plan, ESPP, the system works against you by getting into a higher tax bracket if you are not smart in managing your ESPP!

A recap on previous post: Part1 and Part2. Due to the change in Malaysian taxation system on ESPP, some companies restructured their employee stock purchase plan, ESPP (known as “Scenario 2” outlined here) with regard to the applicable subscription price.

Recall,however, that “Scenario 1” is the norm, and it is as such from previous example in Part2, as below:
Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225Of course, if you are aware of this, first thing which comes to mind –> your company is short-changing you, and the next thing you will do is to call your HR to complain. Then HR will probably need to explain to you it’s not their mistake but it is due to LHDN. But HR doesn’t have that much time to entertain the same enquiry by all “self-aware” staff. Issuing a memo highlighting LHDN new idiotic implementation isn’t their cup of tea. HR is always the good guys *Cough*

A smart C&B director will instead, alter the employee stock purchase plan, ESPP policy regarding the applicable subscription price. What happened now is this: Your company will fix the rule that, for any purchase period in question, the corresponding last trading day stock closing price, less 15%, IS the Purchase Price.
In this case, it is $42.50

However, remember that, previously, if you were to purchase 50 shares at the price of $25.50, it means your accumulated salary deduction allocated for ESPP is $1,275.

With the purchase price now fixed at $42.50, you can only purchase 30 shares units with $1,275, compared to 50 units previously.

Now, your total taxable income here is 30 x (50-42.50) = $225 !!!

Do you see the play of numbers here? Your taxable income is similar to the previous taxation scheme, but you, as an employee, still loses out because you just purchased the shares at a relatively higher price in this new company employee stock purchase plan scheme. Not that you have a choice anyway!

This is what my (ex) company employee stock purchase plan prospectus says:

The Final Verdict: ESPP Part 3 - Employee: 0, Company: 1 by CF Lieu - Certified Financial Planner Malaysia

Oopss…I mean, this.

The Final Verdict: ESPP Part 3 - Employee: 0, Company: 1 by CF Lieu - Certified Financial Planner Malaysia

Indeed this takes into effect starting Nov 2008.

In ChampDog’s words, “…you hide a problem without people realizing it.”

Again, HS Ooi’s remarkable comment on this

From company standpoint, a company will save more by using the average window closing price because they only need to pay you the 15% discount of market price. Of course, when a company is using the lower window price, most probably the company will buy some call options to make sure that in case the market is going up very high(hence the call options are in-the-money) their ESPP cost is still fixed. But this also means that the company have to pay additional premium for the options position they are taking. In a downward market when the call options are out-of-money, they will lose all the premium of the call options position. I think companies will have to spend more if they choose to use the lower window subscription price instead of window closing price. You will probably see more and more companies change to window closing price. So, enjoy the extra benefits while you still can 🙂

It is a win-win for company and government to use the window closing average price instead of lowest price of the windows. This move make smart sense for them, though it is not good for employees.

As a employee, the only control you have over this situation is to set a reminder 2 weeks before the purchase period last share trading day. Pull out your accumulated salary deduction from ESPP to be refunded back to you if the current stock price/trend shows possibility of dropping in short term. Even if you let company purchase the stocks for you, it is not worth to hold ESPP stocks for long term unless huge potential of capital appreciation (but there’s always market risk which you cannot foresee). One cannot be a passive “investor” anymore in this! Understand that the system (company + Government) works against you if you are not smart in managing your own money! At the end of the day, you will likely end up in a higher tax bracket and your net gain could be negative!!


5 thoughts on “The Final Verdict: ESPP Part 3 – Employee: 0, Company: 1”

  1. I'm so enlightened after reading Part1,2 & 3..Now only I realised I've been shortchanged all this while!Thanks for the insightful article CF! Great work! 🙂

  2. Thanks LCF for the link and share this to others. YOu make it the complete one – part 1, part 2, and part 3. 🙂

    Some companies allow you to do a “quick sell” without waiting for 2 weeks. It is almost immediately after you get the share.

  3. Unfortunately, it is unlikely that most people is able to/know how to do this.
    Firstly because the US brokerage account is created by employer and tied to your ESPP only. Alot of restraint.
    Secondly, most wouldn't know how to use call/put options or have their own US brokerage account aside from the ESPP account.

  4. Start selling call options to protect your profits if the stock plummets after the purchase date. (last trading day of the 6 month window in your case)

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