SPP feedback

djb thoroughly responds to my request to poke at the ups and downs of participating in a stock purchase plan at work. I'll take time here to address some new issues he raises, and better explain a couple things.

I agree that there's no "pre-tax gain." I think I understand the W-2 taxing on the 15% discount for those who turn around and sell granted shares right away; it goes some way toward explaining why the company insists on being notified if an employee sells those shares within 18 months of the grant (the company needs to withhold some additional tax). But what does the employee declare as the basis price if he sells shares after, say, two years? I would have thought one would use the discounted price as a basis in that case. Is that correct?

It is interesting that your company’s program discounts from the lower of the prices, beginning or ending, in the six month period. Our program also did that for many years, but recently changed that, shifting to discounting from the end price only. The lame excuse offered by the HR drones was that there were new difficulties under Sarbanes-Oxley associated with properly expensing the discount. At the time I was very worked up about it because the company didn't have the backbone to admit that they were trimming an expense by taking away another part of a benefit, pretending instead that they had no choice. The fact that your company still does their SPP the old way is simply more proof to the contrary.

Your point about the company delaying distribution of stock certificates is well taken. In fact, it is usually a full two weeks from the end of each period before we get new stock certificates in our hands. Naturally there is a risk of significant price change during that time. My coworker and I though both have stock built up in our respective trading accounts that we've held for a long time. If we account for shares in a first-in-first-out manner, then it seems perfectly legitimate that if I know I'll be receiving a stock certificate in two weeks that has 300 "excess" shares, I can sell that number of shares immediately from blocs I've been holding for three to four years.

That's also a good point about wealth diversity. As of this date if I add together the value of all my company stock interests, it constitutes about ten percent of the net worth of my wife and I together. So if it all disappeared next week, that would be the extent of the impact. I feel okay with that, but admittedly I have not decided what the magic percentage should be (25? 30?) beyond which I sell down to purchase different securities. And I should probably think about that soon, because there's a natural (Enron-esque) tendency to not see over-concentration of wealth objectively when that concentrated wealth is going gangbusters.

As for the final queries, while I do not know for sure whether the company is acquiring shares from the open market for the SPP or whether it is inventing new shares, I can state unambiguously that the number of plan shares is finite. That aspect is written into the public filings. It is stated that for any six month period, the maximum shares issued is X (it's in the tens of thousands), and for the full multiyear plan period the maximum number issued is Y (a few hundred thousand). This makes me think that the shares are new issues, diluting existing holdings, since in that case a company has to publicly disclose how such shares are issued and what the maximum level of dilution will possibly be over the time period. The company is quite serious about those maxima, as we found out during the recession. The SPP was oversubscribed not from a sudden up tick in employee participation, but simply from the stock price falling so low. There was withheld money for about 1.5*X shares -- therefore, participants only received around two-thirds of the shares they signed up for. The excess dollars that did not purchase shares simply showed up on the next paycheck.

Warning: benefit-related post

Since djb brought up DRIPs and stuff like that, I wanted to put this out there and see what kind of response I got. One of the programs at my company is a stock purchase plan (SPP) that full-time employees can participate in. Basically you can elect to have up to ten percent of your gross pay withheld for stock purchase. Purchase periods run six months each. At the end of the six month period, you receive a stock certificate for the shares bought with the withheld earnings, although your acquisition price is 0.85 of the market price at the close of the period. The company is apparently funding that 15% difference, your benefit for participating in the program.

Curiously, the company has less than one-third participation in this program (one can tell from certain email distribution lists), and most that do participate do so at withholding levels lower than ten percent. I was one of those persons too until a coworker and I sat down and crunched some numbers. We had been both been in the plan long enough that we had a fair number of shares we'd been holding for years. Given that, we thought, why not go to full ten percent participation for each period and at the end of each six months just sell the extra shares that we don't care to hold long-term?

Consider my coworker's situation: He had been participating to the tune of only two percent of his gross. I don't know what he earns -- let's suppose it's 75k per annum -- in which case he was buying $750 worth of stock every six months and holding it. If the stock is trading at $10/share at the close of the six months, then he acquires at $8.50/share and receives 88 shares and a couple bucks remainder. Now suppose instead he were to partipate at the maximum level, but at the end of the six months sells the difference in shares between ten percent and his usual two percent. In that case he has $3750 withheld, receiving 441 shares at the end of which he immediately sells 353 so he has his customary 88 left over to retain long-term. He receives about $3530 on the sale of the increment. Of course, he did have to make do without $3000 of his usual take home pay for the six months, but nets an extra $530 for his trouble in the end, better than a 17% return on his money in half a year.

Tax-wise, if my coworker has a large number of shares he's been holding from past participation in the program, his 353 shares could be sold from his long-term holdings, which I'm pretty sure get nicer tax treatment. Otherwise he calls it a short-term capital gain, and may have to report the sale to the company for additional tax (W-2) withholding. Regardless, from what I described here is there some big downside that I'm just missing? Because when I think of the SPP this way, it starts to resemble employer 401(k) matching in the sense that there's "free money" there for the taking. Granted, 401(k)'s are often not fully subscribed either, but the psychology there is a little easier to understand because people are walking away from money that they wouldn't have until 2030 or some such year. With the SPP, you can have the extra money in your hands in six months.

It gets spookier. Next quarter, if all employees were to suddenly experience an epiphany and we saw 100% enrollment in the 401(k), that's no skin off my teeth. I'm pretty sure the company would still put up their paltry match for everyone. With the SPP it's different though. The company's obligation to supply shares for the SPP program is finite. If the plan is oversubscribed in terms of shares, everyone's participation gets prorated and curtailed. This strikes me as an unstable situation: while it would seem to be to everyone's advantage to participate to the full extent of the SPP, the SPP as written will not support that! The only way my coworker and I get to enjoy the status quo ante is if most employees continue to not participate, so the prudent course of action (I suppose) is to not talk about the SPP with coworkers!

Tax software saved my butt

This year's tax deadline looms. I was pretty sure I had some money coming to me, so I filed in February, as is my usual custom. I must say however that my taxes this year were more difficult than they've ever been in my lifetime. It's not just that the tax code is getting more complicated; it's also the fact that I have stuff, i.e. the house, other deductions, transactions on capital, and so forth. It used to be that I'd file 1040A and I could pretty much figure it all out on the back of an envelope. Nowdays if I had to depend on paper only, it would literally take me days to read through all the instructions, caveats, worksheets, and so on that say what to do. It's just my dumb luck that personal computers and tax software have happened to keep pace with my personal tax circumstances.

Just take for example the situation with capital gains. I had long term gains and short term losses. Honest to Pete there's a whole blessed two-sided worksheet, not counting instructions, for handling that alone. Of course, how you compute that affects your adjusted gross income figure. The AGI, in turn, affects what percentage of your itemized deductions you can actually take as deductions. It all weaves together, and it's not trivial! Sure, the software cost money, but the hours saved justified the expense five times over.

But just because there's software to help doesn't begin to justify the complexity of the tax code. With or without computers, it's an enormous drain on people's time and effort. There are armies of people whose labours are dominated by preparations and recordkeeping driven by tax compliance. Literally billions of man-hours are being squandered annually. This is work potential that would be released into more productive pursuits by a strict bout of tax simplification. It's almost magically wonderful if you think about how much benefit could be realized with so little cost.

The difficulty of course is political, and the longer the tax code is allowed to grow the harder it is to pull up the weed. Most parts of the tax code, just by costing somebody or benefiting someone else, develop a constituency thereby. There is a constituency for the tuition tax credit. There is a constituency for using work expenses as deductions. There is an enormous constituency for the home mortgage deduction. Each twist and turn of the code breeds its own vocal supporters. On top of that, the code's sheer complexity itself spawns its own breed of constituents. Do you think that H&R Block wants taxes to be simple? Tax attorneys?

That's why true reform is so hard, in this as in other realms. We say we want it but when it gets right down to it, we realize we don't.

Good Friday commute

Didn't really have much problem driving into the city on the holiday. The weirdest thing of note was the guy walking the pedestrian bridge with an eight-foot cross over his shoulder. The cross sure looked like it had a wood finish, but it wasn't slowing the guy down at all so it had to be a cheap veneer or cardboard mockup. A real wood cross that size would've been ninety pounds, easily.

The other part that wasn't working for me was the orange reflective vest the guy was wearing. It made him look like a member of the Jerusalem Public Works Department instead of the savior. "Pilate expects these crosses to be delivered by the end of the flogging hour, so let's hop to it!" Pontius wasn't known to be solicitous concerning public employee union break schedules.

On a similar note, I remember five years ago receiving a postcard from a local church inviting the recipient to Easter services. The picture side of the postcard was a zoom view of a crucifixion re-creation, as seen from behind the cross. What really blew the image for me were the lag bolts, metal washers and butterfly nuts holding the crossbeam to the wood post. That's like having John Wilkes Booth whip out a phaser to shoot Lincoln -- it kinda' takes you out of the moment.

Speaking of which, the Lincoln assassination was also on April 14th, which in 1865 happened to be Good Friday as well.

GPS' Gilded Age ends

Last trip story: Every air traveler is aware that use of "personal electronic devices" is prohibited on commercial airliners in the takeoff and landing phases. During those times, the pilot is using a lot of air-to-ground communication and navigation equipment, and its pretty important that it all function without EMI (electromagnetic interference) from the passenger cabin. But for the majority of the time in the air you are allowed to use certain gizmos -- CD players, laptop computers and one-way pagers being common examples. For years, since 1999 in fact, I have passed time on airplanes holding a GPS receiver to my window, scrounging satellites to get a position fix. I've always thought it was neat to be able to identify specific towns and highways from thirty thousand feet, to try to find landmarks and so forth. I also thought it was pretty cool to note a ground speed of 600 mph on one part of a Tokyo-to-Detroit flight when we were catching the jetstream just right.

Well imagine my annoyance when the American Airlines stewardess told me I couldn't have my GPS on in-flight. I was incredulous. "I am not allowed to use a receiver?" I asked. The stewardess replied with "no" and a stream of four other negative phrases for emphasis. So I scrounged through the back of American Airlines' flight magazine and sure enough, GPS receivers are now on the naughty list for the duration of flight. I was annoyed for a few reasons. First, the stewardess was harshin' my geek buzz and wasn't even trying to be nice about it. Second, I just felt in my bones that this was an ad hoc prohibition. I'd played with Magellan and Garmin receivers on dozens of flights and the greatest reaction I had provoked before was just a cursory check that I wasn't wielding a cellphone. On occasion, a stewardess would actually take interest: I told one once that the GPS said we were at 29000 feet. To my surprise, she then went to the captain to check my story and came back later, marveling that the little receiver was right. But apparently the novelty has worn off these days and the fun has to come to an end.

After my wife was done laughing at me (third annoying factor), she related my predicament to a United pilot who happened to be seated to her right. The United guy was commuting into O'Hare so he could start his work shift that afternoon. The initial reaction of the United pilot was surprise: "I didn't know they were prohibited." I can understand the surprise, considering that the rule varies from airline to airline, plus he knows quite well that the aircraft itself has its own GPS receivers operating in harmony with the rest of the avionics. Once past that, we started talking about the fact that any electronic device that has switching currents is going to produce EMI: radios, TVs, computers, games, you name it. And the pilot added that the aircraft has wires that run the entire length of the cabin for receiving signals, control, and so forth. Now, the chances are overwhelming that any one individual's GPS is no problem at all. But maybe twenty poorly-made units acting together become a problem when you add that to the twenty laptop computers and personal MP3 players already in operation. The United pilot said, "Obviously the airline isn't going to test them all to see which models are okay, so..."

I believe that to a great extent the economics of the situation is trampling the science. I would be willing to wager that my eTrex Vista, with its sub-watt power, low-res LCD and FCC Part 15 Class B compliance, emits far less EMI than your twenty-watt, 2 GHz, SVGA Thinkpad. I'd offer the Vista itself in that wager, and throw in the MapSource CD too. But the airline knows darn well that they'd be driving away their top fares if they kept businessmen from using their computers. You cannot say the same thing for the occasional GPS nerd, so I see how I wound up on the short end of that rule.

Spring break stories

I spent some time in Tennessee and North Carolina last week. Near Nashville, I visited The Hermitage (Andrew Jackson's estate). It was a little pricey. I noted the irony to my wife: seeing the estate necessitated the confiscation of most of the portraits of Andrew Jackson from my wallet.

The scale of the Jackson estate was a couple notches down from The Biltmore (George Vanderbilt estate), which has 250 rooms totaling about 170,000 square feet. The funniest thing I saw there though really had nothing to do with the house itself. I was on a tour of some of the back hallways and balcony areas. On one part of the tour we went up a dimly lit, narrow stairway to emerge on the roof next to a copper dome that capped the huge spiral staircase. It was clear and sunny that day. As I emerged into the light, a mother and her teenaged daughter were huddled over on the left, both having a little sneezing fit. The dad explained drily, "sun sneezes". What an odd reflex reaction! And an inherited trait to boot!

I'll tell you about another funny malady I heard about on my trip. It's funny partly because most sufferers inflict it upon themselves, as I shall explain. An emergency room nurse turned me on to the affliction known as "Saturday Night Palsy." Medically, Saturday Night Palsy is compression of the radial nerve (on the inner part of your forearm). Naturally, if you press on that too long, you'll lose feeling and motor control of your hand. So where does the name come from? Well, it would seem to originate from the legions of amateur drinkers who tie one on over the weekend and then flop over to sleep it off (much of their body weight pressing on an arm pinned underneath). The same thing can happen to a drunk slumped into an armchair: the persistent pressure of a chair arm propping up the limb will produce the effect. When the person comes to the next day and feeling doesn't come back to the hand quickly enough, the patient begins to wonder whether he didn't seriously injure himself during his drunken -- and possibly unremembered -- escapades. An emergency room visit ensues, as does another diagnosis of Saturday Night Palsy.