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Every second Friday, when an employer gives out paycheques to its employees, some employers also give company shares as part of every paycheque (ESOP).

Now, quite a few big employers with many many employees do this. I am assuming this means that every other Friday, the company is going into the open public market, buying those shares and then giving it out to the employees.

For companies with large number of employees, should this not automatically cause the share price to spike every other Friday because of this huge buying demand?

Nosrac
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Victor123
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4 Answers4

11

This is an old question that has an accepted answer, but it has gotten bumped due to an edit and the answers given are incorrect.

I am assuming this means that every other Friday, the company is going into the open public market, buying those shares and then giving it out to the employees.

No. Companies will internally hold shares that it intends to offer employees as additional compensation. There are no open market transactions, so the market price of the stock does not change (at least not due to buying pressure). The only net effect is an equivalent expense for the compensation, but that should already be accounted for in the share price as normal operating expenses.

These share may come through an initial buyback from the market, but more common is that when companies issue new shares they keep some internally for exactly this situation. If they issued new shares every pay period, it would dilute the existing shares several times a quarter which would be difficult to account for.

D Stanley
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Many companies actually just issue new shares for employee compensation instead of buying back existing ones. So actually, the share price should go down because the same value is now diluted over more shares.

In addition, this would not necessarily affect companies with many employees than those with fewer employees because companies with more employees tend to be bigger and thus have more shares (among which the change in demand would be distributed).

Also, I think many companies do not issue shares to employees every pay day, but just e.g. once every quarter.

MrMage
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Let's take an example: IBM has about 430,000 employees worldwide. Assume the average yearly salary is $80K (it's probably less, since a lot of jobs are offshore). If every employee took 10% of their pay as stock, that's $132 million every two weeks. But IBM's market capitalization is about $153 billion, so stock purchases would be less than 0.1% of that.

jamesqf
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Pre-Enron many companies forced the 401K match to be in company shares. That is no longer allowed becasue of changes in the law. Therefore most employees have only a small minority of their retirement savings in company shares. I know the ESOP and 401K aren't the same, but in my company every year the number of participants in the company stock purchase program decreases.

The small number of participants and the small portion of their new retirement funds being in company shares would mean this spike in volume would be very small.

The ESOP plan for my employer takes money each paycheck, then purchases the shares once a quarter. This delay would allow them to manage the purchases better. I know with a previous employer most ESOP participants only held the shares for the minimum time, thus providing a steady steam of shares being sold.

mhoran_psprep
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