Concentration risk and employer shares

Employee share schemes are generous, tax-advantaged and widely used, and they produce a concentration of risk that most participants never quantify.

The double exposure

Why it is different from any other holding.

An employee holding shares in their employer has their income, their savings and frequently their pension exposed to the same company.

If the company fails, the job and the investment go together, at exactly the moment when savings would be most needed.

Which is the opposite of diversification, and it is the specific risk that the historical corporate failures involving employee shareholdings illustrated so painfully.

Why people hold too much

The reasons are understandable.

Schemes are frequently generous, with discounted purchase or matching shares, which makes participation rational.

Tax advantages, which are real and which encourage holding for a qualifying period.

Familiarity: employees believe they understand the company, which is partly true and does not eliminate market risk.

Loyalty and a sense that selling signals a lack of confidence.

Inertia, since selling requires a decision and holding does not.

And, in some cases, restrictions preventing sale for a period.

The scale of it

Worth quantifying for yourself.

Calculate the total value of employer shares held, including vested and unvested awards, options and any pension holding.

Express it as a percentage of your total investable assets.

Many people are surprised by the figure, particularly after a period of good share performance which has increased the position precisely when it should have been reduced.

Any single holding above a modest percentage of a portfolio warrants examination, and employer shares warrant a lower threshold than other holdings because of the income exposure.

Participating without concentrating

The practical approach.

Participate in schemes where they are genuinely advantageous — a discount or a match is free value.

Sell at the earliest point consistent with the tax and scheme rules, and reinvest the proceeds in a diversified portfolio.

Which captures the benefit of the scheme without retaining the concentration.

The tax consequences of selling should be understood, since qualifying periods frequently determine treatment, and selling early can forfeit relief.

Which means the optimal point is generally the earliest date at which the tax treatment is secured.

The reluctance to sell

Which is behavioural.

Selling feels like a statement about the company, which it is not — it is a statement about your own diversification.

People also anchor on the price at which shares were awarded and are reluctant to sell below a previous high.

And there is a persistent belief that inside knowledge confers an advantage, which is both legally constrained and frequently mistaken.

A useful test: if you were given the cash equivalent instead, would you buy this much of this single company's shares?

For almost everyone the answer is no, which reveals the position as a default rather than a decision.

Options and unvested awards

Which complicate the picture.

Unvested awards represent exposure that cannot be sold and should be counted in the concentration assessment.

Options have leveraged exposure to the share price, which increases the effective concentration beyond the notional value.

Vesting schedules mean the position rebuilds continuously, which is why a one-off sale does not solve the problem — a standing policy of selling on vesting does.

And restrictions on dealing periods mean planning matters.

Other concentrations

Which are less discussed.

Property, particularly a home, which is a large, illiquid, undiversified, domestic asset and which most people do not count in their allocation.

A business, for the self-employed, which is the same double exposure as employer shares in a more extreme form.

Sector concentration, where someone working in an industry also invests in it.

And, at national level, holding a domestic-tilted portfolio while earning in the same economy.

Each of these compounds the others.

The practical policy

What to write down.

A maximum percentage of investable assets in any single company, particularly the employer.

A standing instruction to sell vested shares at the earliest tax-efficient point.

Where to reinvest the proceeds.

A review at each vesting event.

And a recognition that this is risk management rather than a view on the company, which is what makes it possible to do without feeling disloyal.

General information only, not investment advice. Tax treatment of share schemes varies by country — consult a regulated financial adviser and a qualified accountant.