WHY YOU SHOULD BUY YOUR EMPLOYER´S SHARES / THE ECONOMIST

Why you should buy your employer’s shares

Even though doing so flies in the face of most financial advice

Illustration of a man with a novelty hand with a pointing finger but the finger is a certificate with a star on, in his other hand he has a briefcase with a star on / Illustration: Satoshi Kambayashi

It is not hard to see why Jamie Dimon owns a lot of shares in JPMorgan Chase. 

He is the bank’s boss and its shareholders want his interests to be aligned with theirs. 

Paying him mostly in stock, rather than cash, helps ensure that they are. 

An executive with a significant proportion of savings invested in their firm’s shares has tied their future to the company’s. 

This discourages them from doing things that might pad their wallets in the short term at the expense of shareholders’ long-term returns, such as expanding the firm unsustainably fast. 

The incentives are stronger still if—as with Mr Dimon—the boss is promised shares for delivery some time hence, or if any sales prompt newspaper headlines.

It is rather more surprising that many mid-level bankers own a lot of their employers’ stock. 

Banks probably benefit from awarding them shares: as with bosses, aligning rank-and-filers’ interests with shareholders’ makes sense, especially when relatively junior employees can risk the firm’s funds and reputation. 

But the bankers themselves might well make their living from preaching the virtues of diversification to clients. 

This gospel says that tying your savings to your employer’s prospects is unwise, since you already depend on them for your salary. 

It is particularly risky if you work in an industry famous for culling staff in down years. 

Such people know better than anyone what to do with a stock award: sell it and use the proceeds to buy investments that spread your risk rather than concentrating it.

At this point your columnist, a mid-level financial journalist who purports also to understand diversification, must confess some sympathy with these bankers. 

This is because he owns shares in The Economist Group. 

Worse, he did not even receive them as part of his pay, but actively decided to invest. 

Here, then, is why you should consider flouting the best financial advice around and buying shares in your employer.

For a start, doing so might come with some psychological upside (provided you are not too troubled by taking unwarranted risks with your savings). 

Left-wingers often approve of employee ownership because it gives workers a slice of the profits that would otherwise accrue only to avaricious capitalists. 

Right-wingers like it because it ushers workers into the capitalist tent. 

Less is said about the quiet feeling that you are on the same side as your employer, rather than having been pitted against them. 

Worried that you are overworked for your salary, or that too little of your firm’s revenue flows into wages? 

Any gains are going to shareholders, so it helps to be one of them—even if you own too few shares to benefit much. 

The hedge might be more emotional than financial, but it is not nothing.

Then there are the more cold-eyed advantages. 

Suppose you work for a privately owned firm that is about to be taken over by a competitor (which, for the record, The Economist is not). 

If you have spurned all offers to buy shares, the first you might hear of the takeover is when the rival company’s executives march into your office and start laying people off. 

If you are a shareholder, though, you might get some warning: no matter how small your holding, you will probably get a vote on the acquisition.

For some, investing in their employer might also be a rare opportunity to gain exposure to a kind of asset that they might otherwise have difficulty acquiring. 

Anyone can buy shares in JPMorgan, but buying private equity is more difficult for retail savers, even now that some barriers have begun to come down. 

Access to the high-risk, and potentially high-reward, leveraged buy-outs that powered the growth of private markets in the 2010s is still mostly limited to big, institutional investors.

A frequent exception is the employees of companies being bought out, who can often invest on the same terms as the giants. 

Their doing so would horrify a diversification purist, adding the extra risk of leverage to the double whammy of betting savings on the firm that pays their salary.

Yet such employees are also well placed to judge the wisdom of the buy-out: whether borrowing costs can be met, for instance, or if the growth required to justify the valuation is realistic.

None of this means anyone should invest a big share of savings in their employer unless they are obliged to—especially if they work for a listed firm, with shares that confer fewer advantages. 

A small stake, though, might be worth defying financial advisers. 

And for your columnist’s sake, in more ways than one, please keep buying The Economist.