Say you are a highly coveted skilled worker in a hyper-competitive industry. This is a good day. You received two job offers for similar jobs. Both seem challenging and fun. Two companies are both publicly trading. They are comparable by large: in benefits, perks, and management. The total cash equivalent of the offers is also comparable. For argumentâ€™s sake, letâ€™s call it $20,000 per month. But there is a critical difference in its structure.
Company A just give you $20,000 in cash. Simple and easy.
Company B give you $10,000 in cash. Their stock is trading at $10 per share today. They promised to give you 12,000 shares of stock by the end of each year of your employment. For the past several years, their stock has risen in price very nicely.
Which would you choose?
It is quite simple; company B is actually offering you more since their stock probably will appreciate. By the end of the 1st year, you would have received $120,000 in cash and 12,000 shares. Those shares may have gone up to more than $10 per share. You would have ended up better. We all knew that stock prices may fall as well, but the likelihood is small as the company is doing well and competitive. The answer seems to be B. Yes?
Company B forces you to invest half of your income in a single company. It does not really matter how well the stock performs. The #1 principle in investing is diversification: never put all your eggs in a basket.
Take A’s offer, buy 12,000 shares of B, and you will end up exactly the same place had you taken B’s offer. The investment, now, is your own choice.