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what does erisa have to do with health insurance | the majority of health insurance plans that are offered by employers are covered under erisa plans that fall in this category include defined benefit and defined contribution plans | |
what are erisa violations | erisa violations occur when a fiduciary doesn t meet their responsibilities as outlined by erisa for instance a plan administrator who doesn t provide full disclosure about fees and plan benefits may be in violation of the law this may also be the case if a fiduciary misuses funds or fails to send updated information about the plan to participants including statements disclosures and notices the bottom lineas a federal law erisa s main purpose is to protect the interests of workers who participate in qualified plans these include certain employer sponsored healthcare and retirement plans such as 401 k s and pensions erisa regulates plan administrators and sponsors to ensure that they provide plan information to their participants and remain compliant with their fiduciary duties and it s not just plan participants like you who are protected it s your beneficiaries too | |
what is an employee stock option | an employee stock option eso is a type of equity compensation granted by companies to their employees and executives rather than granting shares of stock directly the company gives options on the stock instead esos are call options that give the employee the right to buy the company s stock at a specified price for a finite period of time terms of esos will be fully spelled out for an employee in an employee stock options agreement typically esos cannot be sold unlike standard listed or exchange traded options in general the greatest benefit of a stock option is realized if the price of a company s stock rises above the call option exercise price when this happens call options are exercised and the holder obtains the company s stock at a discount the employee may choose to immediately sell the stock in the open market for a profit or hold onto the stock over time investopedia sydney saporitounderstanding employee stock optionscorporate benefits for some or all employees may include equity compensation plans these plans are known for providing financial compensation in the form of stock equity esos are just one type of equity compensation a company may offer there are two main types of eso in broad terms esos and other types of equity compensation plans give employees and stakeholders an equity incentive to build a company and share in its growth and success for employees esos and any other type of equity compensation plan offer key benefits for employers esos stock options are a benefit often associated with startup companies which may issue them in order to reward early employees when and if the company goes public they are awarded by some fast growing companies as an incentive for employees to work towards growing the value of the company s shares stock options can also serve as an incentive for employees to stay with the company the options are canceled if the employee leaves the company before they vest esos do not include any dividend or voting rights important conceptsthere are two key parties to the eso the grantee employee and grantor employer the grantee also known as the optionee can be an executive or another employee while the grantor is the company that employs the grantee the grantee is given equity compensation in the form of esos usually with certain restrictions one of the most important of which is the vesting period the vesting period is the length of time that an employee must wait before they can exercise their esos the waiting time serves as an incentive to the employee to perform well and stay with the company vesting follows a pre determined schedule that is set up by the company at the time of the option grant esos are considered vested when the employee is allowed to exercise the options and purchase the company s stock note that the stock may not be fully vested when purchased with an option in certain cases despite exercising the stock options the company may not want to run the risk of employees making a quick gain by exercising their options and immediately selling their shares and subsequently leaving the company stock options plan and agreementif you receive an options grant carefully review your company s stock options plan as well as the options agreement to determine the rights available and restrictions applied to employees the stock options plan is drafted by the company s board of directors and contains details of the grantee s rights the options agreement will provide the key details of your option grant such as the vesting schedule how the esos will vest shares represented by the grant and the strike price if you are a key employee or executive it may be possible to negotiate certain aspects of the options agreement such as a vesting schedule where the shares vest faster or a lower exercise price it may also be worthwhile to discuss the options agreement with your financial planner or wealth manager before you sign it vesting exampleesos typically vest in chunks over time on predetermined dates as set out in the vesting schedule for example you may be granted the right to buy 1 000 shares with the options vesting 25 per year over four years with a term of 10 years so 25 of the esos conferring the right to buy 250 shares would vest in one year from the option grant date another 25 would vest two years from the grant date and so on if you don t exercise your 25 vested esos after year one you would have a cumulative increase in exercisable options thus after year two you would now have 50 vested esos if you do not exercise any of the esos options in the first four years you would have 100 of the esos vested after that period which you can then exercise in full or in part as mentioned earlier we had assumed that the esos have a term of 10 years this means that after 10 years you would no longer have the right to buy shares therefore the esos must be exercised before the 10 year period counting from the date of the option grant is up continuing with the above example let s say you exercise 25 of the esos when they vest after one year this means you would get 250 shares of the company s stock at the strike price it should be emphasized that the record price for the shares is the exercise price or strike price specified in the options agreement regardless of the actual market price of the stock in some eso agreements a company may offer a reload option which offers employees an additional attractive benefit with a reload option an employee can be granted more esos when they exercise currently available esos esos and taxationwe now arrive at the eso spread which is the difference between the exercise price and the market price as we ll see later ordinary income tax is applied to this spread the following points need to be borne in mind with regard to eso taxation let s say you have esos with an exercise price of 25 when the market price of the stock reaches 55 you decide to exercise 25 of the 1 000 shares granted to you the record price would be 6 250 for the shares 25 x 250 shares since the market value of the shares is 13 750 55 x 250 shares if you promptly sell the acquired shares you would net pre tax earnings of 7 500 13 750 6 250 this spread 7 500 is taxed as ordinary income in your hands in the year of exercise even if you do not sell the shares this feature can create a large tax liability if you continue to hold the stock and it plummets in value due to the exercise let s recap an important point why are you taxed at the time of eso exercise the ability to buy shares at a significant discount to the current market price a bargain price in other words is viewed by the irs as part of the total compensation package provided to you by your employer and is therefore taxed at your income tax rate thus even if you do not sell the shares acquired pursuant to your eso exercise you trigger a tax liability at the time of exercise image by sabrina jiang investopedia 2020intrinsic value vs time value for esosthe value of an option consists of intrinsic value and time value extrinsic value time value depends on the amount of time remaining until expiration the date when the esos expire and several other variables given that most esos have a stated expiration date of up to 10 years from the date of option grant their time value can be quite significant while time value can be easily calculated for exchange traded options it is more challenging to calculate time value for non traded options like esos since a market price is not available for them to calculate the time value for your esos you will use a theoretical pricing model like the well known black scholes option pricing model to compute the fair value of your esos you will need inputs such as the exercise price time remaining stock price risk free interest rate and volatility into the model in order to get an estimate of the fair value of the eso from there it is a simple exercise to calculate time value as can be seen below remember that intrinsic value which can never be negative is zero when an option is at the money atm or out of the money otm for these options their entire value therefore consists only of time value the exercise of an eso will capture intrinsic value but usually gives up time value assuming there is any left this results in a potentially large hidden opportunity cost assume that the calculated fair value of your esos is 40 as shown below subtracting intrinsic value of 30 gives your esos a time value of 10 if you exercise your esos in this situation you would be giving up time value of 10 per share or a total of 2 500 based on 250 shares image by sabrina jiang investopedia 2020the value of your esos is not static but will fluctuate over time based on movements in key inputs such as the price of the underlying stock time to expiration and above all volatility consider a situation where your esos are out of the money i e the market price of the stock is now below the esos exercise price image by sabrina jiang investopedia 2020it would be illogical to exercise your esos in this scenario for two reasons first it is cheaper to buy the stock in the open market at 20 compared with the exercise price of 25 and second by exercising your esos you would be relinquishing 15 of time value per share if you think the stock has bottomed out and wish to acquire it it would be preferable to simply buy it at 25 and retain your esos giving you larger upside potential with some additional risk since you now own the shares as well in broad terms esos and other types of equity compensation plans give employees and stakeholders an equity incentive to build a company and share in its growth and success esos vs listed optionsthe biggest and most obvious difference between esos and listed options is that esos are not traded on an exchange and hence do not have the many benefits of exchange traded options exchange traded options especially on the biggest stocks have a great deal of liquidity and trade frequently so it is easy to estimate the value of an options portfolio not so with your esos because there is no market price reference point many esos are granted with a term of 10 or more years but there are virtually no listed options that trade for that length of time leaps long term equity anticipation securities are among the longest dated options available but even they only go three years out which would only help if your esos have three years or less to expiration 2therefore option pricing models are needed to value your esos your employer is required on the options grant date to specify a theoretical price of your esos in your options agreement be sure to request this information from your company and also find out how the value of your esos has been determined option prices can vary widely depending on the assumptions made in the input variables for example your employer may make certain assumptions about the expected length of employment and estimated holding period before exercise which could shorten the time to expiration with listed options on the other hand the time to expiration is specified and cannot be arbitrarily changed assumptions about volatility can also have a significant impact on option prices if your company assumes lower than normal levels of volatility your esos would be priced lower it may be a good idea to get several estimates from other models to compare them with your company s valuation of your esos while esos do have similar rights to listed options the right to buy shares is not standardized and is spelled out in the options agreement listed options have standardized contract terms concerning the number of shares underlying an options contract expiration date etc this uniformity makes it easy to trade options on any optionable stock whether it is apple or google or qualcomm for instance if you trade a call option contract you have the right to buy 100 shares of the underlying stock at the specified strike price until expiration similarly a put option contract gives you the right to sell 100 shares of the underlying stock until expiration with esos the exact details about when they expire may differ from one company to the next also there is no automatic exercise feature you have to notify your employer if you wish to exercise your options for all listed options in the u s the last day of trading is the third friday of the calendar month of the option contract if the third friday happens to fall on an exchange holiday the expiration date moves up by a day to that thursday 3 at the close of trading on the third friday the options associated with that month s contract stop trading and are automatically exercised if they are more than 0 01 1 cent or more in the money 4thus if you owned one call option contract and at expiration the market price of the underlying stock was higher than the strike price by one cent or more you would own 100 shares through the automatic exercise feature likewise if you owned a put option and at expiration the market price of the underlying stock was lower than the strike price by one cent or more you would be short 100 shares through the automatic exercise feature note that despite the term automatic exercise you still have control over the eventual outcome you can provide alternate instructions to your broker that take precedence over any automatic exercise procedures or you can close out your position prior to expiration listed options have standardized strike prices exercise prices coming in increments such as 1 2 50 5 or 10 depending on the price of the underlying security higher priced stocks have wider increments with esos since the strike price is typically the stock s closing price on a particular day there are no standardized strike prices in the mid 2000s an eso backdating scandal in the u s resulted in the resignations of many executives at top firms this practice involved granting an option at a previous date instead of the current date thus setting the strike price at a lower price than the market price on the grant date and giving an instant gain to the option holder eso backdating has become much more difficult since the introduction of the sarbanes oxley act as companies are now required to report option grants to the sec within two business days 5vesting gives rise to control issues that are not present for listed options esos may require the employee to attain a level of seniority or meet certain performance targets before they vest if the vesting criteria are not crystal clear it may create a murky legal situation especially if relations sour between the employee and employer in addition with listed options once you exercise your calls and obtain the stock you can dispose of it as soon as you wish without any restrictions however with acquired stock through an exercise of esos there may be restrictions that prevent you from selling the stock even if your esos have vested and you can exercise them the actual acquired stock may not be vested this can pose a dilemma since you may have already paid tax on the eso spread as discussed above and now hold a stock that you cannot sell or that is declining as scores of employees discovered in the aftermath of the 1990s dot com bust when numerous technology companies went bankrupt counterparty risk is a valid issue that is hardly ever considered by those who receive esos for listed options in the u s the options clearing corporation serves as the clearinghouse for options contracts and guarantees their performance 6 thus there is zero risk that the counterparty to your options trade will be unable to fulfill the obligations imposed by the options contract but as the counterparty to your esos is your company with no intermediary in between it would be prudent to monitor its financial situation to ensure that you are not left holding valueless unexercised options or even worse worthless acquired stock you can assemble a diversified options portfolio using listed options but with esos you have concentration risk since all your options have the same underlying stock in addition to your esos if you also have a significant amount of company stock in your employee stock ownership plan esop you may unwittingly have too much exposure to your company a concentration risk that has been highlighted by finra 7valuation and pricing issuesthe main determinants of an option s value are volatility time to expiration the risk free rate of interest strike price and the underlying stock s price understanding the interplay of these variables especially volatility and time to expiration is crucial for making informed decisions about the value of your esos in the following example we assume an eso grants the right when vested to buy 1 000 shares of the company at a strike price of 50 which is the stock s closing price on the day of the option grant making this an at the money option upon grant the first table below uses the black scholes option pricing model to isolate the impact of time decay while keeping volatility constant the second table illustrates the impact of higher volatility on option prices as can be seen the greater the time to expiration the more the option is worth since we assume this is an at the money option its entire value consists of time value the first table demonstrates two fundamental options pricing principles image by sabrina jiang investopedia 2020the table below shows option prices based on the same assumptions except that volatility is assumed to be 60 rather than the 30 shown above this increase in volatility has a significant effect on option prices for example with 10 years remaining to expiration the price of the eso increases 53 to 35 34 while with two years remaining the price increases 80 to 17 45 further on shows option prices in graphical form for the same time remaining to expiration at 30 and 60 volatility levels similar results are obtained by changing the variables with volatility at 10 and the risk free interest rate at 2 the esos would be priced at 11 36 7 04 5 01 and 3 86 with time to expiration at 10 five three and two years respectively image by sabrina jiang investopedia 2020the key takeaway from this section is that merely because your esos have no intrinsic value do not assume that they are worthless because of their long time to expiration compared to listed options esos have a significant amount of time value that should not be frittered away through early exercise image by sabrina jiang investopedia 2020risk and reward of owning esosas discussed in the preceding section your esos can have significant time value even if they have zero or little intrinsic value in this section we use the common 10 year grant term to expiration to demonstrate the risk and reward associated with owning esos | |
when you receive the esos at the time of grant you typically have no intrinsic value because the eso strike price or exercise price is equal to the stock s closing price on that day as your exercise price and the stock price are the same this is an at the money option | once the stock begins to rise the option has intrinsic value which is intuitive to understand and easy to compute but a common mistake is not realizing the significance of time value even on the grant day and the opportunity cost of premature or early exercise in fact your esos have the highest time value at grant assuming that volatility does not spike soon after you acquire the options with such a large time value component as demonstrated above you actually have value that is at risk assuming you hold esos to buy 1 000 shares at an exercise price of 50 with volatility at 60 and 10 years to expiration the potential loss of time value is quite steep if the shares are unchanged at 50 in 10 years time you would lose 35 000 in time value and would be left with nothing to show for your esos this loss of time value should be factored in when computing your eventual return let s say the stock rises to 110 by expiration in 10 years time giving you an eso spread akin to intrinsic value of 60 per share or 60 000 in total however this should be offset by the 35 000 loss in time value that results from holding the esos to expiration leaving a net pre tax gain of just 25 000 unfortunately this loss of time value is not tax deductible which means that the ordinary income tax rate assumed at 40 would be applied to 60 000 and not 25 000 taking out 24 000 for compensation tax paid at exercise to your employer would leave you with 36 000 in after tax income but if you deduct the 35 000 lost in time value you would be left with just 1 000 in hand holding esos until expirationbefore we look at some of the issues surrounding early exercise not holding esos until expiration let s evaluate the outcome of holding esos until expiration in light of time value and tax costs the chart below shows the after tax net of time value gains and losses at expiration at a price of 120 upon expiration actual gains after subtracting time value are just 7 000 this is calculated as a spread of 70 per share or 70 000 in total less compensation tax of 28 000 leaving you with 42 000 from which you subtract 35 000 for time value lost for a net gain of 7 000 | |
when you exercise the esos you would have to pay the exercise price plus tax even if you do not sell the stock recall that exercise of esos is a taxable event in this case that amount equates to 50 000 plus 28 000 for a total of 78 000 if you immediately sell the stock at the prevailing price of 120 you receive proceeds of 120 000 from which you would have to subtract 78 000 the gain of 42 000 should be offset by the 35 000 decline in time value leaving you with 7 000 | image by sabrina jiang investopedia 2020early or premature exerciseas a way to reduce risk and lock in gains early or premature exercise of esos must be carefully considered since there is a large potential tax hit and big opportunity cost in the form of forfeited time value in this section we discuss the process of early exercise and explain financial objectives and risks | |
when an eso is granted it has a hypothetical value that because it is an at the money option is pure time value this time value decays at a rate known as theta which is a square root function of the time remaining | assume you hold esos that are worth 35 000 upon grant as discussed in the earlier sections you believe in the long term prospects of your company and plan to hold your esos until expiration below shows the value composition intrinsic value plus time value for itm otm and atm options value composition for in out and at the money eso option with strike of 50 prices in thousands image by sabrina jiang investopedia 2020even if you begin to gain intrinsic value as the price of the underlying stock rises you will be shedding time value along the way although not proportionately for example for an ito eso with a 50 exercise price and a stock price of 75 there will be less time value and more intrinsic value for more value overall the otm options bottom set of bars show only pure time value of 17 500 while the atm options have time value of 35 000 the further out of the money that an option is the less time value it has because the odds of it becoming profitable are increasingly slim as an option gets more in the money and acquires more intrinsic value this forms a greater proportion of the total option value in fact for a deeply in the money option time value is an insignificant component of its value compared with intrinsic value when intrinsic value becomes value at risk many option holders look to lock in all or part of this gain but in doing so they not only give up time value but also incur a hefty tax bill we cannot emphasize this point enough the biggest downside of premature exercise is the big tax event it induces and the loss of time value you are taxed at ordinary income tax rates on the eso spread or intrinsic value gain at rates as high as 40 | |
what s more it is all due in the same tax year and paid upon exercise with another likely tax hit at the sale or disposition of the acquired stock even if you have capital losses elsewhere in your portfolio you can only apply 3 000 per year of these losses against your compensation gains to offset the tax liability 8 | after you have acquired stock that presumably has appreciated in value you are faced with the choice of liquidating the stock or holding it if you sell immediately upon exercise you have locked in your compensation gains the difference between the exercise price and stock market price but if you hold the stock and then sell it later after it appreciates you may have more taxes to pay remember that the stock price on the day you exercised your esos is now your basis price if you sell the stock less than a year after exercise you will have to pay the short term capital gains tax to get the lower long term capital gains rate you would have to hold the shares for more than a year you thus end up paying two taxes compensation and capital gains many eso holders may also find themselves in the unfortunate position of holding on to shares that reverse their initial gains after exercise as the following example demonstrates let s say you have esos that give you the right to buy 1 000 shares at 50 and the stock is trading at 75 with five more years to expiration as you are worried about the market outlook or the company s prospects you exercise your esos to lock in the spread of 25 you now decide to sell one half of your holdings of 1 000 shares and keep the other half for potential future gains here s how the math stacks up to summarize note that this does not count the time value lost from early exercise which could be quite significant with five years left for expiration having sold your holdings you also no longer have the potential to gain from an upward move in the stock that said while it seldom makes sense to exercise listed options early the non tradable nature and other limitations of esos may make their early exercise necessary in the following situations basic hedging strategies for esosbasic eso hedging strategies include writing calls buying puts and constructing costless collars of these strategies writing calls is the only one where the erosion of time value in esos can be offset by getting time decay working in one s favor we strongly recommend that you discuss any hedging strategies with your financial planner or wealth manager also review your company s code of ethics and or related policies there may be restricted practices on dealing in options related to your company in which you may be considered an insider say that the stock of xyz corp closed at 175 13 on november 15 the date on which the longest dated options available on the stock are the three year calls and puts let s assume you are an xyz employee who is granted esos to buy 500 shares of the company on nov 29 which will vest in 1 3 increments over the next three years and have 10 years to expiration for reference the three year 175 calls in the market are priced at 32 81 ignoring bid ask spreads for simplicity while the 175 puts trade at 24 05 here are three basic hedging strategies based on your assessment of the stock s outlook to keep things simple we assume that you wish to hedge the potential 500 share long position to just past three years of these strategies writing calls is the only one where you can offset the erosion of time value in your esos by getting time decay working in your favor buying puts aggravates the issue of time decay but is a good strategy to hedge downside risk the costless collar has minimal cost but does not resolve the issue of eso time decay | |
how do esos differ from listed options | esos differ from exchange traded or listed options in many ways as they are not traded their value is not easy to ascertain unlike listed options esos do not have standardized specifications or automatic exercise finally eso holders must be cognizant of counterparty risk and concentration risks | |
are esos worthless at first | although esos have no intrinsic value when granted they are not worthless because of their lengthy time to expiration compared to listed options esos have a significant amount of time value that should not be frittered away through early exercise | |
what are the tax implications of receiving employee stock options | while the option grant is not a taxable event taxation begins at the time of exercise the sale of acquired stock triggers another taxable event tax payable at the time of exercise is a major deterrent against early exercise of esos despite the large tax liability and loss of time value incurred through early exercise it may be justified in certain cases such as when cashflow is needed portfolio diversification is required the stock or market outlook is deteriorating or stock needs to be delivered for a hedging strategy using calls the bottom lineesos are a form of equity compensation granted by companies to their employees and executives like a regular call option an eso gives the holder the right to purchase the underlying asset the company s stock at a specified price for a finite period of time esos are not the only form of equity compensation but they are among the most common stock options are of two main types incentive stock options generally only offered to key employees and top management receive preferential tax treatment in many cases as the irs treats gains on such options as long term capital gains non qualified stock options nsos can be granted to employees at all levels of a company as well as to board members and consultants also known as non statutory stock options profits on these are considered to be ordinary income and are taxed as such eso holders should become familiar with their company s stock options plan as well as their options agreement to understand any restrictions and clauses therein employees should also become familiar with their company s code of ethics or professional conduct policies importantly you should consult your financial planner or wealth manager to gain the maximum benefit of this potentially lucrative component of compensation | |
what is an employee stock ownership plan esop | an employee stock ownership plan esop is an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock esops give the sponsoring company the selling shareholder and participants various tax benefits making them qualified plans and are often used by employers as a corporate finance strategy to align the interests of their employees with those of their shareholders | |
how does an employee stock ownership plan esop work | an esop is usually formed to facilitate succession planning in a closely held company by allowing employees the opportunity to buy shares of the corporate stock esops are also offered as a retirement benefit esops are set up as trust funds and can be funded by companies putting newly issued shares into them putting cash in to buy existing company shares or borrowing money through the entity to buy company shares esops are used by companies of all sizes including a number of large publicly traded corporations contrary to what some people say companies with an esop must not discriminate and are required to appoint a trustee to act as the plan fiduciary among other things it is not possible for senior employees to receive more shares or for esop participants to have no voting rights although to be clear senior employees will naturally accumulate and have more vested shares over time advantages of esopssince esop shares are part of the employees remuneration package companies can use esops to keep plan participants focused on corporate performance and share price appreciation by giving plan participants an interest in seeing the company s stock perform well these plans supposedly encourage participants to do what s best for shareholders since the participants themselves are shareholders employees meanwhile are presented with a way to make more money increase their compensation and essentially be rewarded for their hard work and commitment having a stake in the company should make employees feel more appreciated and perhaps make going to work more exciting esops incentivize employees to give their all and thus can favor all parties esop up front costs and distributionscompanies often provide employees with such ownership with no up front costs the company may hold the provided shares in a trust for safety and growth until the employee retires or resigns companies typically tie distributions from the plan to vesting which gives employees rights to employer provided assets over time typically they earn an increasing proportion of shares for each year of their service vesting can happen immediately after a certain number of years cliff or gradually over time graded | |
when a fully vested employee retires or resigns from the company the firm purchases the vested shares back from them the money goes to the employee in a lump sum or equal periodic payments depending on the plan | once the company purchases the shares and pays the employee the company redistributes or voids the shares employees who leave the company voluntarily cannot take the shares of stock with them only the cash payment | |
how to cash out of an esop | being vested doesn t necessarily mean you can cash out of your esop generally it s only possible to redeem these shares if you terminate employment retire die or become disabled age is often an important factor distributions are rarely permitted to people under 59 or 55 if they have left the company if there are distributions before these ages they would normally be subject to a 10 tax penalty specific information about how to cash out of an esop can be found in the terms listed in the plan s guidelines some esops may distribute dividend payments to employees who are still at the company other in service distributions may be done by some plans as well esop and other forms of employee ownershipstock ownership plans provide packages that act as additional employee benefits and embody the corporate culture that company managements want to maintain other versions of employee ownership include direct purchase programs stock options restricted stock phantom stock and stock appreciation rights | |
what does esop stand for | esop stands for employee stock ownership plan an esop grants company stock to employees often based on the duration of their employment typically it is part of a compensation package where shares will vest over a period of time esops are designed so that employees motivations and interests are aligned with those of the company s shareholders from a management perspective esops have certain tax advantages along with incentivizing employees to focus on company performance | |
how does an esop work | first an esop is set up as a trust fund here companies may place newly issued shares borrow money to buy company shares or fund the trust with cash to purchase company shares meanwhile employees can accumulate a growing number of shares an amount that can rise over time depending on their employment term these shares are meant to be sold only at or after the time of retirement quitting or termination and the employee is remunerated by receiving the cash value of their shares | |
what is an example of an esop | consider an employee who has worked at a large tech firm for five years under the company s esop they have the right to receive 20 shares after the first year and 100 shares total after five years when the employee retires they will receive the share value in cash other types of stock ownership plans may be offered instead of an esop they include stock options restricted shares and stock appreciation rights among others | |
are esops good for employees | yes esops can generally be considered a benefit for workers these programs tend to be adopted by companies that don t chop and change staff frequently and often result in a bigger payout and greater financial compensation for employees the bottom lineesops are generally a win win for employers and employees encouraging greater effort and commitment in exchange for bigger financial rewards however they are not always straightforward and can be frustrating if the participant doesn t fully understand the terms of their particular plan not all esops are the same rules on actions such as vesting and withdrawals can vary and it s important to be aware of them to make the most of this benefit and not potentially miss out on a big extra bonus | |
what is an employee stock purchase plan espp | an employee stock purchase plan espp is a company run program in which participating employees can purchase company stock directly at a discounted price employees contribute to the plan through payroll deductions which build up between the offering date and the purchase date at the purchase date the company uses the employee s accumulated funds to purchase stock in the company on behalf of the participating employees understanding employee stock purchase plans espps with an employee stock purchase plan employees have the option to buy stock in their employer at a discounted price this is offered as a benefit of employment when they are hired in the same way that access to a 401 k plan for retirement savings is a benefit the goal is that employees can purchase valuable stock for lower than the market price allowing them to make a profit the company growing and becoming more successful then causes the stock to become even more valuable which then increases the benefit to the employee with employee stock purchase plans the discount rate on company shares depends on the specific plan but can be as much as 15 lower than the market price espps may have a look back provision allowing the plan to use a historical closing price of the stock this price may be either the price of the stock offering date or the purchase date often whichever figure is lower espps are categorized in two ways qualified and non qualified qualified plans require the approval of shareholders before implementation and all plan participants have equal rights in the plan the offering period of a qualified espp cannot be greater than three years and there are restrictions on the maximum price discount allowable non qualified plans are not subject to as many restrictions as a qualified plan however non qualified plans do not have the tax advantages of after tax deductions that qualified plans do participation in the company espp may only commence after the offering period has begun this period begins on the offering date and this date corresponds with the grant date for the stock option plans the purchase date will mark the end of the payroll deduction period some offering periods have multiple purchase dates in which stock may be purchased your employment contract should contain these dates if you are unsure where to find information about your eesp contact the hr department at your employer espps typically do not allow individuals who own more than 5 of company stock to participate restrictions are often in place to disallow employees who have not been employed with the company for a specified duration often one year all other employees typically have the option to participate in the plan though they are not required to during the application period employees state the amount to be deducted from their pay and contributed to the plan this may be subject to a percentage limitation in addition the internal revenue service irs restricts the total dollar amount to be contributed to 25 000 per calendar year most espps grant employees a price discount of up to 15 taxes and employee stock purchase plansthe taxation rules regarding espps are complex in general you will be taxed on any stock you purchase through an espp during the year you sell it it can be counted either as taxable income or as a deductible loss the difference between what you paid for the stock and what you received when you sell it is considered a capital gain or loss any discount offered to the original stock price is taxed as ordinary income while the remaining gain is taxed as a long term capital gain the entire gain will be taxed as ordinary income if you have not held it for can i cash out my employee stock purchase plan yes the payroll deductions you have set aside for an espp are yours if you have not yet used them to purchase stock you will need to notify your plan administrator and fill out any paperwork required to make a withdrawal if you have already purchased stock you will need to sell your shares can i sell espp stock right away yes you can sell stock purchased through your espp plan immediately if you want to guarantee that you profit from your discount otherwise the value of the stock may go up which increases your profit or it may go down causing you to lose money however you will pay a lower tax rate if you hold the stock for more than a year and sell it more than two years after the offering date | |
is an espp income or capital gains | if you sell stock purchased through your espp more than 12 months after you purchased it any gain beyond the discount that you received through the plan is taxed as a capital gain the discount is taxed as ordinary income in general capital gains tax rates are much lower than ordinary income tax rates ranging from 0 to 20 depending on your income bracket the bottom linean employee stock purchase plan is an employment benefit that allows employees to purchase stock in the company that employs them at a discounted price sometimes up to 15 employees can build contributions through payroll deductions until the purchase date specified in their contract is a program in which employees can purchase company stock at a discounted price in general shares purchased through an espp are treated like other stock at tax time you would report a capital gain or loss on your income taxes the year that you sell the stock though you may have to pay your ordinary tax rate on the difference between what you paid at the market price of the stock | |
what is an employer identification number ein | the term employer identification number ein refers to a unique identifier that is assigned to a business entity so that it can easily be identified by the internal revenue service irs eins are commonly used by employers for the purpose of reporting taxes the number is made up of nine digits and is formatted as xx xxxxxxx businesses can apply for eins directly through the irs which usually issues them immediately understanding the employer identification number ein employer identification numbers are issued to identify business entities in the united states the same way social security numbers ssns are used to identify individual residents of the country the ein is also known as a federal tax identification number as noted above eins are unique nine digit numbers that are formatted as xx xxxxxxx eins are issued by the irs and include information about the state in which the entity is registered the agency uses eins to identify taxpayers who are required to file various business tax returns you need an ein if you have employees operate as a corporation or partnership file certain tax returns withhold taxes on income other than wages paid to a non resident alien have a keogh plan or are involved with certain types of organizations including trusts and estates business entities must apply for an ein by phone online fax or mail before they can begin operations many types of businesses and other entities can be issued eins including the irs is not biased toward the size of the company this means even those with only one employee are just as eligible for an ein as multinational corporations the ein is not considered to be sensitive information the same way a social security number is and is freely distributed by businesses online and in print publications | |
do i need an employee identification number | the irs requires certain companies to obtain an ein as part of reporting requirements a business or other entity needs an ein if it | |
how to get an employer identification number | applying for an ein costs nothing applications can be made by phone for those who aren t in the united states but will do business in the country fax mail or online the process is fairly easy and uncomplicated applicants must fill out form ss 4 application for employer identification number which is available on the irs website the irs requires the following information to be included on the application in order to issue an ein such as the name of the company s principal officer grantor general partner trustor owner or any other title along with their personal taxpayer identification number some of the information that must be included on the form includes a business must be located in the u s or u s territories to apply for an ein online once the online information is validated an ein is assigned immediately the person responsible for the business regardless of their title within the company must be an individual and not an entity unless it s a government entity benefits of an employer identification numbereins are unique to the businesses to which they are assigned the numbers never expire and the same number set is never reissued to another business even if the original employer goes out of business the main advantage of getting one is being able to operate you can t run your business without it you must apply for an employer identification number before you even get started you also need an ein to do the following getting an ein allows you to keep your personal finances separate from your business ones this allows you to shield your personal information and keep it protected from identity theft self employed individuals such as subcontractors don t need an ein however they can still get one and it might be a good idea as they must give an identification number to those paying them for tax reporting purposes an ein can be used instead of their social security number to protect against identity theft businesses that change their ownership structure usually must apply for a new ein for example sole proprietors who plan to incorporate their businesses must apply for a new ein closing your employee identification numberonce you are assigned an ein that identification number will forever be associated with you and your company that ein becomes permanently associated with that entity and the irs can technically never cancel an ein an ein is a critical part in required financial reporting even if an entity never files any return the ein is still associated with it once an ein is issued the identification number can be used at a later day if the entity needs if you do receive an identification number but later decide the number was never needed the irs can close your associated business account this is often the case for startup companies that never actually launch a physical letter must be mailed indicating the legal name business address ein number and reason for the account closure the ein will remain only the irs business account will be suspended employee identification number vs taxpayer identification number tin a tax identification number tin is a broad term used to describe any type of identification number an ein is a specific type of tin a tin is a generic descriptor for an assortment of numbers that can be used on a tax form including but not limited to depending on the nature of the particular taxpayer the ein may or may not be the tin used by the irs for sole proprietors the tin is often their social security number for corporations partnerships trusts and estates their tin is often an ein | |
what happens if you lose or misplace your ein | if you misplace your ein look for it on the notice sent to you by the irs when your ein was issued you can also try to recover it by contacting the financial institution where you do your day to day banking you can also find it on your previous tax returns if all else fails contact the irs business specialty tax line at 1 800 829 4933 make sure you have any identifying information on hand before you speak to an operator | |
does my business need an ein | most businesses will need an employer identification number specifically one will need an ein if it has employees operates as a corporation or partnership files certain tax returns employment excise or alcohol tobacco and firearms withholds taxes on income other than wages paid to non resident aliens or has a keogh plan additionally individuals involved with organizations such as trusts estates and non profits among others will need an ein | |
how do i find an employer identification number | you can find an employer identification number using the irs notice generated when you applied for it with banks or creditors you used it to open accounts at on any state licenses or permits previous tax returns or by contacting the irs | |
when applying online you can get an ein immediately it normally takes one week to get an ein when applying by fax the irs also accepts paper mail applications though it quotes an expected turnaround time of four to five weeks | the bottom linean employer identification number ein is a unique nine digit number that is assigned to a business entity every business needs an employer identification number to report taxes to request an ein applicants must fill out form ss 4 available on the irs website the ein must not be confused with the tax identification number tin which is a broader term used to describe any type of identification number thus an ein is a specific type of tin | |
what is employers liability insurance | employers liability insurance is an insurance policy that handles claims from workers who have suffered a job related injury or illness not covered by workers compensation a type of liability insurance it can be packaged with workers compensation to further protect companies against the costs associated with workplace injuries illnesses and deaths however employers liability insurance does not cover legal costs from employee lawsuits charging discrimination sexual harassment or wrongful termination to cover these situations an employer would need to purchase a separate type of policy called employment practices liability insurance epli | |
how employers liability insurance works | the majority of private sector employees are covered by workers compensation laws established at the state level federal employees work under federal workers compensation laws states require most employers to carry workers compensation insurance workers compensation provides some level of coverage for medical expenses and lost wages for employees or their beneficiaries when an employee is injured falls sick or is killed as a result of their job 12 there is no need for the employee to sue the employer to establish fault in order to qualify for workers compensation benefits however if an employee feels that workers compensation does not adequately cover their loss perhaps because they feel their employer s negligence caused their injury they may decide to sue their employer for punitive damages arising from their situation for things such as pain and suffering this is where employers liability insurance comes in designed to deal with expenses that fall outside the realm of the workers compensation statutes or general liability insurance it provides additional protection against financial loss for the company or business employers liability coverage is typically purchased along with workers compensation in fact employers liability insurance is often called part 2 of a workers compensation policy part 1 of the policy is the actual workers comp which pays for medical death expenses and partial lost wages from work related injuries and illnesses part 2 would be the employers liability coverage protecting the business from claims for additional damages and compensation 3the average additional sum a firm without employer liability insurance protection would have to pay in court cases according to the hiscox guide to employee lawsuits 4 | |
what employers liability insurance covers | other sorts of claims covered by employers liability insurance include many companies choose to carry employers liability insurance to help cover the costs of defending the organization in court claims can become complicated and costly for employers particularly in the case of a lawsuit a liability claim may be legitimate or not but even so many businesses cannot accept that level of risk and they take measures to insure against it their liability coverage applies to both court awarded sums and to payments reached in out of court settlements 3in the event of a payout under an employers liability insurance policy an employer can help limit their losses by including as a condition of the payout a clause that releases the employer and their insurance company from further liability that is responsibility related to the incident in question employers liability insurance policies tend to place limits on payouts per employee per injury and overall these limits might be as low as 100 000 per worker 100 000 per incident and 500 000 per policy 5 employers liability insurance only applies to full or part time employees it does not cover independent contractors or employees working outside of the u s or canada 6employers liability insurance limitsemployers liability insurance coverage does not cover every situation exclusions include criminal acts fraud illegal profit or advantage purposeful violation of the law and claims arising out of downsizing layoffs workforce restructurings plant closures strikes mergers or acquisitions if an employer intentionally aggravates an employee s work related injury or illness employers liability insurance will not cover the employers financial obligations to the employee and the employer will have to pay if the employee wins in court also many states do not allow insurers coverage to apply to punitive damages however many employers liability insurance policies do manage to cover these costs through a most favored jurisdiction clause the clause specifies that the policy s coverage will be regulated by the state law that does allow employers liability insurance to provide compensation for punitive damages a jurisdiction that favors them in other words 7take for example a company that has offices and work sites all around the u s a claim arises in a state where punitive damages are excluded from employers liability insurance if the company is established in a state that does allow punitive damages coverage then the company employers liability insurance policy can protect it after all it s important to note that employers liability insurance and workers compensation do not cover employers against employee claims alleging discrimination for example based on sex race age or disability wrongful termination harassment slander libel and other employment related issues such as failure to promote the employer would need to purchase a separate type of policy called employment practices liability insurance epli for this kind of coverage 8 | |
how is employers liability insurance different from general liability | in terms of the scope of what it encompasses general liability insurance only covers a business from outside claims including customer injuries or negligence it does not protect a business from employee related negligence employers liability insurance is for legal claims filed by injured workers | |
what is excluded from employers liability insurance | there are a number of circumstances not covered by employers liability insurance including criminal acts fraud illegal profit violation of the law and any claims that are the result of downsizing layoffs restructurings mergers or acquisitions | |
do you need epli and eli | epli or employment practices liability insurance epli is different from eli or employers liability insurance employers need to buy epli to make sure that they are covered from employee lawsuits that allege discrimination sexual harassment or wrongful termination none of which are covered by employers liability insurance the bottom lineemployers liability insurance protects a company from legal claims filed by workers who have experienced a job related injury or illness it is a type of liability insurance that in conjunction with workers compensation covers companies against costs and claims made by injured employees criminal acts fraud and violation of the law are among the circumstances not covered by employers liability insurance employee lawsuits regarding discrimination sexual harassment or wrongful termination are covered under employment practices liability insurance epli | |
what are employment agency fees | the term employment agency fee refers to a fee paid by a company to an employment agency when it successfully places a suitable employee with that employer fees tend to vary widely from one agency to another as they are at the discretion of the agency there are two types of employment agency fees employer paid fees and applicant paid fees understanding employment agency feescompanies that hire workers may do so in several ways directly by advertising positions through their own human resources hr departments or through employment agencies agencies are organizations that do the legwork for employers they post positions find and match employers with temporary and contract employees employment agencies may earn fees from any employer whether they re public organizations or private companies different employment agencies may have different methods of negotiating and charging fees with employment agency fees also referred to as placement agency fees how and how much an agency may charge often depends on a variety of factors including the difficulty of the placement the industry the position market conditions and several other factors fees are generally contingent on both parties employer and employee coming to an agreement on an employment contract or the terms of employment employment agency fees are normally contingent on the employee being hired headhunters are one type of recruitment service these companies are hired by major firms to locate talent especially those who fall into a specific category because most headhunters work directly with executives they are also called executive recruiters their fees are normally paid only when and if the candidate is hired types of employment agency feesas mentioned above there are two types of employment agency fees employer paid and applicant paid fees under the employer paid fee the employer assumes complete responsibility for the fee to the agency so the employee pays nothing this is the more common type of fee arrangement and is preferred by employment agencies the employee may not even notice that a fee has been attached to their job placement as the hiring company may factor in their hiring costs when accounting for the compensation for a role as mentioned above headhunters are paid for their services once an employee is hired their fees range anywhere between 20 to 30 of the new hire s first year salary this is paid directly by the hiring company to the agency rather than by the employee with the proliferation of telecommunications and it companies there is a different type of employer paid fee arrangement some employment agencies have become the employer and a hiring company can contract for the services of such employees from them the company pays the employment agency a monthly fee for employees instead of to the employee the employees supplied by the employment agency remain employees of the agency rather than of the company with this arrangement also referred to as the employee paid fee the employment agency fees are charged to the applicant for the service of finding an employer this normally entails an employment agency which acts as a staffing agency claiming a portion of a worker s hourly pay during the term of a contract for example if a worker is offered a 12 month contract position at 49 an hour the hiring company may have actually budgeted 60 an hour the employment agency may pocket the difference or a portion of the difference in lieu of a one time fee without the employee ever knowing of the arrangement although employment agencies receive fees to match people with employers employees should be wary of groups that charge them directly for their placement services a legitimate agency should never charge an employee a fee to find them work or to place them with an employer | |
what is employment insurance ei | employment insurance ei is an unemployment insurance program in canada that allows individuals who have recently lost a job to receive temporary financial assistance employment insurance can also be extended to individuals who are unable to work because of illness or who are caring for a young child or a seriously ill family member in addition to financial assistance the program assists the unemployed with job search services 1understanding employment insurance ei the employment insurance act replaced the unemployment insurance act of 1996 the updated scheme was designed to link unemployment benefits with wages and to reduce penalties for those who could only find temporary work to qualify for benefits individuals must work a certain number of hours and the length of time for which benefits are provided depends on an individual s geographic region s unemployment rate employment insurance offers a wide range of benefits to those who qualify for them employers contribute 1 4 times the amount of employee premiums 2 since 1990 there has been no government contribution to this fund the amount a person receives and how long they can stay on ei varies with their previous salary how long they were working and the unemployment rate in their area ei birthing benefits are offered to biological birthing parents including surrogate people who cannot work because they are pregnant or have recently given birth and parents of a newly adopted child 3a maximum of 15 weeks of ei birthing benefits is available and according to the canadian government website if a child has been born or placed with you after march 17 2019 you may be eligible for 5 extra weeks of standard parental care benefits or 8 extra weeks of extended parental benefits depending on your circumstances 3benefits can be paid as early as 12 weeks before the expected date of birth and can end as late as 17 weeks after the actual date of birth the weekly benefit rate is 55 of the claimant s average weekly insurable earnings up to a maximum amount 4ei sickness assistance provides benefits to people who are unable to work because of sickness injury or quarantine applicants can receive up to a maximum of 15 weeks of ei sickness benefits 5ei also offers compassionate care benefits which are paid to people who have to be away from work temporarily to provide care or support to a family member or who is gravely ill themselves with a significant risk of death a maximum of 26 weeks of compassionate care benefits may be paid to eligible people 6special considerationsover half of ei benefits are paid in ontario and the western provinces however ei is especially important in the atlantic provinces where there are more unemployed persons part of the reason why is that many atlantic province workers are employed in seasonal work such as fishing forestry or tourism they go on ei over the winter when there is no work there are special rules for fisherfolk making it easier for them to collect employment insurance | |
what is the employment to population ratio | the employment to population ratio also known as the employment population ratio is a macroeconomic statistic that measures the civilian labor force currently employed against the total working age population of a region municipality or country it is viewed as a broad metric of labor unemployment it is often calculated by dividing the number of people employed by the total number of people of working age understanding the employment to population ratiocompared with other measures of labor force participation the employment to population ratio is not as affected by seasonal variations or short term fluctuations in the labor market as a result it is often considered to be a more reliable indicator of job shrinkage or growth than the unemployment rate if 50 million people are employed in an area with 75 million people of working age the employment to population ratio is 66 7 the calculation is as follows labor force employedtotal population frac text labor force employed text total population total populationlabor force employed this measure is similar to the labor force participation rate which measures the total labor force and not just the part of the labor force already employed like the unemployment rate does divided by the total population the civilian labor force is a term used by the u s bureau of labor statistics bls to refer to americans who are considered either employed or unemployed those not included in the labor force count include military personnel federal government employees retirees handicapped or discouraged workers and some agricultural workers many economists use the total working age population in the denominator but the official measure of the employment to population ratio measured by the bls uses the noninstitutional civilian population which excludes the following 1disadvantages of the employment to population ratiothe employment to population ratio does not include the institutionalized population such as people in mental hospitals and prisons or people in school who are studying for a career it also doesn t take into account underground market labor the employment to population ratio also fails to account for people who are over or under the working age but are still working such as babysitters child actors or moonlighting retirees these workers may be counted in the employed side of the ratio but may not be included in the total number of people of working age as a result their employment inaccurately increases the ratio the employment to population ratio does not take hours worked into account so it fails to distinguish between part time and full time workers the employment to population ratio vs the unemployment rateunsurprisingly based on the characteristics outlined above the employment to population ratio does not directly relate to the unemployment rate for example in february 2020 the employment to population ratio was 61 1 but the unemployment rate was only 3 5 23 together these numbers only account for 64 6 of the population this necessarily raises the question of what happened to the remaining third of the population the largest discrepancy between these two numbers exists because the unemployment figure does not indicate the number of people without employment people who want a job but have given up on their quest to find one are not included in the nation s unemployment number the unemployment rate usually only indicates the number of unemployed people who are actively looking for jobs it also does not include those who have exhausted their unemployment benefits which may artificially inflate the employment to population ratio people who have retired early and those who have decided to go back to school to further their job prospects are not taken into account in the unemployment figure however their absence from the workforce is accounted for in the employment to population ratio additionally while the e p attempts to quantify employment numbers it fails to qualify the nature of that number that means that if 100 000 people with graduate degrees and decades of work experience were laid off from jobs paying 200k per year and were then rehired to stock the shelves at a national supermarket chain for 15k per year the employment to population ratio would look stable even though the economic impact would be devastating | |
what does encroachment mean | in real estate encroachment means one property owner is violating the rights of another by building on or extending a structure to the neighbor s land or property intentionally or otherwise encroachment can be a problem along disputed property lines understanding encroachmentproperty and land surveys are an important part of homeownership not only do they help determine property value but they also help establish property lines and boundaries professional surveyors are responsible for completing these surveys many homeowners get their first survey when they apply for a mortgage because lenders require them to ensure the loan matches the property s value property owners can get surveys completed at any time especially when someone disputes or encroaches on property lines most mortgage lenders require a land survey as part of the approval process to ensure the loan matches the property value encroachment happens when someone traverses boundaries outlined in a survey violating the property rights of another property owner encroaching on someone else s property is akin to trespassing that is entering another person s grounds without their express permission a homeowner encroaches on their neighbor s property if they build a new structure add to an existing structure or extend their fence beyond the lawful boundaries that separate both properties some property owners encroach on their neighbors by knowingly going beyond their property lines someone who builds a fence or makes an addition to their home despite knowing of the property lines does so intentionally but in most cases encroachment is unintentional when a property owner is either unaware of or has wrong information about legal boundaries for instance a property owner may unintentionally encroach on a neighbor s property by allowing a hedge or a tree limb to grow beyond property limits structural encroachment occurs when a property owner builds or extends a structure onto the public domain such as sidewalks or roads in most cases sidewalks and residential streets are generally public property owned by the municipal government this means that a property owner who builds a driveway or erects landscape components trees bushes and flowers that encroach on public property may have the structures removed by the government furthermore the property owner may not be compensated for any damages that occur from tearing down his or her structures special considerationssince a property survey outlines the physical layouts of a property including the measurement of metes and bounds wrong information contained in the survey may lead to a physical intrusion on a neighbor s land unintentional encroachment problems are sometimes resolved with a simple conversation between both parties however if the disagreement on whether someone s property right was violated persists the issue may be taken to court for a resolution while encroachment may occur without the knowledge of the violator property owners should carry out due diligence before erecting any structures that may fall close to the boundary that separates their property from another property owners wishing to make changes near their property lines may want to talk to their neighbors or have a land survey done to make sure the work falls within their own property boundaries | |
what is an easement | people often confuse encroachment with easement both involve a property owner making extensions over their neighbor s property while encroachments are the unauthorized use of the neighbor s property easements are agreed upon by both parties in many cases the party responsible for the easement compensates the other neighbor an example of an easement can be seen when a property owner explicitly gives a neighbor permission to access a nearby beach through his property | |
what is an example of encroachment | a common example of encroachment would be the building of a fence if one property owner constructs a new fence without being certain of where the property line falls he could inadvertently build the fence on his neighbor s property | |
what is a land survey | many people who have bought a new home are familiar with numerous steps and costs involved before closing on the sale can take place one of those fees typically is for a land survey which is handled by a company that confirms the precise boundaries of the property being sold the bottom lineencroachment in real estate commonly involves disputed boundaries separating the properties of neighbors one neighbor encroaching on another s property might be unintentional but in some cases it might be intentional if the violator believes he has a right to the disputed land land surveys clear up most property disputes and can help avoid such disputes if they are sought before beginning any building projects near a property line in some cases an easement provides agreed upon access to a portion of property | |
what is an encumbrance | an encumbrance is a claim against a property made by a party who is not the property owner an encumbrance can impact the transferability of the property and restrict its free use until the encumbrance is lifted the most common types of encumbrance apply to real estate these include mortgages easements and property tax liens not all forms of encumbrance are financial for example easements are non financial encumbrances an encumbrance can apply to personal property as well as real estate as an accounting term encumbrance refers to restricted funds inside an account that are reserved for a specific liability investopedia jake shiunderstanding encumbrancethe term encumbrance covers a wide range of financial and non financial claims placed on a property by parties other than the title holder property owners may be encumbered from exercising full that is unencumbered control over their property in some cases the property can be repossessed by a creditor or seized by a government some encumbrances involving securities affect the marketability of those securities for example if an investor uses the securities in a brokerage account as collateral for a loan from the brokerage they may not be able to sell them the brokerage would be able to take them in case of default by the investor or if the investor can sell them the brokerage would be entitled to enough of the proceeds to repay the loan an easement or a lien can make a title unmarketable while this does not necessarily mean the title cannot be bought and sold it can enable the buyer to back out of the transaction despite having signed a contract buyers may even seek damages in some jurisdictions other encumbrances such as zoning laws and environmental regulations do not affect a property s marketability but do prohibit specific uses of and improvements to the land that s why for example in hong kong the seller of a property is legally required to inform the real estate agent and purchaser of any encumbrances against the property to avoid problems in the sales process the real estate agent will provide the buyer with a land search document that will have a list of any encumbrances 1it is important for buyers of real estate to be aware of any encumbrances on a property since these will often transfer to them along with ownership of the property types of encumbrancesthere are a various types of encumbrances especially when it comes to real estate this is due to real estate s many applications each type of encumbrance is meant to protect parties and specify exactly what each claim entails an easement refers to a party s right to use or improve portions of another party s property or to prevent the property owner from using or improving the property in certain ways an affirmative easement allows the party that possesses the easement to use a property as defined by the easement for example a utility company may have the right to run a gas line through a person s property or pedestrians might have the right to use a footpath passing through that property holders of the easement must abide by its terms or face potential legal action a negative easement allows the party that possesses the easement to stop certain actions as defined by the easement for example a neighbor may have the right based on agreement with the property owner next door to prevent that owner from mowing their lawn on certain days of the week an easement in gross benefits the easement owner as an individual rather than as an owner of a property therefore the easement can t be passed on to anyone who might buy the easement owner s property it is nullified once the easement owner moves for example jennifer owns an easement that she negotiated with her neighbor that gives her the right to use her neighbor s well but that right would not pass on to someone who bought jennifer s property encroachment occurs when a party who is not the property owner intrudes on or interferes with the property for example by building a fence over the lot line a trespass or planting a tree with branches that hang over onto the adjoining property a nuisance an encroachment creates an encumbrance on both properties until the issue is resolved the property housing the encroachment has its free use encumbered while the owner of the encroaching improvement does not have title to the land it s built on a lease is an agreement whereby someone rents a property for an agreed upon rate and period of time it is a form of encumbrance by which the lessor landlord does not give up title to the property but their use of the property is significantly constrained by the lease agreement a lien is a type of security interest an encumbrance that affects the title to a property it gives a claimant the right to seize the property as collateral for an unmet obligation usually an unpaid debt the creditor can then sell the property to recoup at least a portion of their loan a tax lien is an encumbrance imposed by a government to force the payment of taxes in the u s a federal tax lien trumps all other claims on a debtor s assets a mechanic s lien is a claim on personal or real property made by a claimant who has performed services on the property for example if a contractor made adjustments to your property that were never paid for the contractor might establish a lien judgment liens are secured against the assets of a defendant in a lawsuit a mortgage is one of the most common types of security interests essentially it is a lien against a real estate property the lender generally a bank retains an interest in the title to a house until the mortgage is paid off if the borrower cannot repay the mortgage the lender may foreclose seizing the house as collateral and evicting the inhabitants a restrictive covenant is an agreement that a seller writes into a buyer s deed of property to restrict how the buyer may use that property for example there might be a provision that requires the buyer to leave a building s original facade intact as long as they do not break the law restrictive covenants can be as specific and arbitrary as the parties involved are willing to agree to special considerationencumbrance accounting refers to money set aside to pay for anticipated liabilities for example a company may reserve a sum of cash to settle up obligations in its accounts payable and salaries that must be paid to employees are an encumbrance the presence of an encumbrance can give the illusion that there are more available funds inside an account than what is actually free for use the money that has been set aside cannot be used for any other expenditures or transactions encumbrance accounting therefore ensures that a business does not overspend its budget | |
what if i buy real estate with an encumbrance | that depends on the encumbrance an encumbrance on your newly purchased property may be simply a mortgage or it may be a financial lien placed by someone owed money for work they did for the previous owner that wasn t paid it could be a property tax lien placed by the county or it might be a zoning regulation that prohibits you from building a structure you d hoped to have be sure to research all possible encumbrances before you purchase a home so you understand how you might be obligated financially or otherwise | |
what does it mean if a property is encumbered | it means that some party has placed a claim on the property that affects what the property owner may do with it | |
how do i find out about encumbrances on a property | you can request this specific information from your real estate agent or the seller in addition when you perform a title search you should find out about any outstanding claims or liens the bottom linean encumbrance is a claim or right held by someone other than a property owner that can affect how someone might use the property as well as their ability to sell it there are various types of encumbrances as described above some may affect a property owner in a negative way more than others it s important to uncover any and all encumbrances on property whether personal or real estate in which you re interested before buying that way you can proceed confidently with your purchase or walk away | |
what is end to end | end to end describes a process that takes a system or service from beginning to end and delivers a complete functional solution usually without needing to obtain anything from a third party it often refers to vendors that can see a project through from beginning to end and supply everything needed to create a workable solution be it hardware software labor written materials and procedures end to end solutions also adhere to a philosophy that eliminates middle layers or steps which helps to optimize the performance and efficiency of a business this includes pulling in minimal parties along the full project life cycle to ensure minimal disruptions are incurred from start to finish it is most commonly used in the information technology it sector investopedia laura porterunderstanding end to end in information technologygenerally end to end solutions are used with vendors that offer comprehensive systems that keep pace with a business s ever changing infrastructure requirements and the changing demands of the it sector itself end to end suppliers generally handle all of a system s hardware and software including installation implementation and maintenance an end to end solution might cover everything from the client interface to data storage a company that offers end to end video conferencing products for example will provide everything including the monitors and network connections in e commerce end to end processing occurs when one company provides a service to another in which it manages the sales order tracking and delivery of a product | |
when dealing with complex systems or services it is often easier and more cost effective for the customer to have only one supplier and one point of contact also it solutions that involve multiple providers for different parts of the workflow only increase the cost of managing the process so are not considered to be true end to end solutions | end to end processes are often used to embrace operational efficiency for example the bureau of the fiscal service s office of financial innovation and transformation of the federal government developed end to end frameworks this framework strives to reduce unnecessary steps automate processes and achieve large scale efficiencies by transforming end to end services the department has identified up to 3 billion of potential cost savings 1examples of end to end servicesin the world of procurement an end to end process could mean analyzing each and every point in a company s supply chain from sourcing and ordering raw materials to the distribution of goods to end consumers end to end procurement software solutions offer organizations a total overview of their supply chain such as how long it takes for goods to be sent from suppliers and how much those goods cost another example of end to end processing is in logistics where service providers take care of inventory management storage and distribution by eliminating as many layers and steps as possible a logistics specialist can optimize distribution and minimize disruptions from road congestion vehicle breakdowns and the like in the petroleum industry for example transportation and logistics companies offer customers flexible and cost effective end to end services from order planning to inventory monitoring loading and transportation to delivery the latter includes supplying fuel and lubricants to service stations aviation fuel to airports and bitumen to the asphalt industry | |
what does the phrase end to end mean | end to end refers to a full process from start to finish it is often used to describe a service that sees something through from the kick off or initiation through the final product it may be used to describe a one time project i e implementation of new software or may be an internal process i e setting up a new vendor in an accounting system from start to finish | |
what is an end to end product | an end to end product is an item that manages the full development process of a new product from the start of development through final delivery to customers the end to end process may incorporate multiple departments but it refers to the full span of activities needed from start to finish to furnish the final deliverable | |
what is a full project life cycle | the project management lifecycle often consists of four stages initiation planning execution and close out an end to end process will often consist of all four stages as the process begins with the start of a project or process and ends with the final wrap up after product or project delivery has been made | |
how is end to end services implemented in it | end to end services are often utilized in it as it meshes well with the implementation and utilization of software often a provider will offer support in the set up of a product the provider will then offer ongoing support services including troubleshooting assistance upgrading to new versions and daily operational support the provider s goal is to offer assistance in every facet of the software that may be used from start to finish | |
what is endogenous growth theory | endogenous growth theory is an economic theory which argues that economic growth is generated from within a system as a direct result of internal processes more specifically the theory notes that the enhancement of a nation s human capital will lead to economic growth by means of the development of new forms of technology and efficient and effective means of production understanding endogenous growth theorythe endogenous growth theory offered a fresh perspective on what engineers economic growth it argued that a persistent rate of prosperity is influenced by internal processes such as human capital innovation and investment capital rather than external uncontrollable forces challenging the view of neoclassical economics endogenous growth economists believe that improvements in productivity can be tied directly to faster innovation and more investments in human capital as such they advocate for government and private sector institutions to nurture innovation initiatives and offer incentives for individuals and businesses to be more creative such as research and development r d funding and intellectual property rights the idea is that in a knowledge based economy the spillover effects from investment in technology and people keep generating returns influential knowledge based sectors such as telecommunications software and other high tech industries play a particularly important role here central tenets to endogenous growth theory include history of endogenous growth theoryendogenous growth theory emerged in the 1980s as an alternative to the neoclassical growth theory it questioned how gaps in wealth between developed and underdeveloped countries could persist if investment in physical capital like infrastructure is subject to diminishing returns economist paul romer put forward the argument that technological change is not just an exogenous byproduct of independent scientific developments he sought to prove that government policies including investment in r d and intellectual property laws helped foster endogenous innovation and fuel persistent economic growth romer previously complained that his findings hadn t been taken seriously enough however he was awarded the 2018 nobel prize in economics for his studies on long term economic growth and its relationship with technological innovation his concepts are also regularly discussed by politicians when they debate ways to stimulate economies 1criticism of endogenous growth theoryone of the biggest criticisms aimed at the endogenous growth theory is that it is impossible to validate with empirical evidence the theory has been accused of being based on assumptions that cannot be accurately measured | |
what is an endogenous variable | an endogenous variable is a variable in a statistical model that is changed or determined by its relationship with other variables within the model in other words an endogenous variable is synonymous with a dependent variable meaning it correlates with other factors within the system being studied therefore its values may be determined by other variables endogenous variables are the opposite of exogenous variables which are independent variables or outside forces however exogenous variables can have an impact on endogenous factors understanding endogenous variablesendogenous variables are important in econometrics and economic modeling because they show whether a variable causes a particular effect economists employ causal modeling to explain outcomes by analyzing dependent variables based on a variety of factors for example in a model studying supply and demand the price of a good is an endogenous factor because the price can be changed by the producer supplier in response to consumer demand economists also include independent variables to help determine to which extent a result can be attributed to an exogenous or endogenous cause endogenous variables have values that shift as part of a functional relationship between other variables within the model the relationship is also referred to as dependent and is seen as predictable in nature the variables typically correlate in such a way that a movement in one variable should result in a move in the other variable in other words the variables should correlate with each other however they don t necessarily need to move in the same direction meaning a rise in one factor could cause a fall in another as long as the change in the variables is correlating it s considered endogenous regardless of whether it s a positive or negative correlation although endogenous variables are the dependent variables that correlate with each other knowing to what extent exogenous variables impact a model is important to consider outside of economics other fields that use models with endogenous variables include meteorology and agriculture sometimes the relationship in these models is only endogenous in one direction for example while pleasant weather may lead to a higher rate of tourism higher tourism rates do not affect the weather endogenous vs exogenous variablesin contrast to endogenous variables exogenous variables are considered independent in other words one variable within the formula doesn t dictate or directly correlate to a change in another exogenous variables have no direct or formulaic relationship for example personal income and color preference rainfall and gas prices and education obtained and favorite flower would all be considered exogenous factors examples of endogenous variablesfor example assume a model is examining the relationship between employee commute times and fuel consumption as the commute time rises within the model fuel consumption also increases the relationship makes sense since the longer a person s commute the more fuel it takes to reach the destination for example a 30 mile commute requires more fuel than a 20 mile commute other relationships that may be endogenous include in what areas are endogenous variables important endogenous variables show whether a variable causes a particular effect that makes them important in econometrics and economic modeling | |
what other fields use endogenous variables | agriculture and meteorology are among the other fields that use models with endogenous variables | |
how do endogenous variables differ from exogenous variables | unlike endogenous variables exogenous variables are considered independent one variable within the formula doesn t dictate or directly correlate to a change in another the bottom linean endogenous variable is a variable in a statistical model it s changed or determined by its relationship with other variables within the model to put it another way an endogenous variable is synonymous with a dependent variable meaning it correlates with other factors within the system being studied therefore its values may be determined by other variables | |
what is an endorsement | an endorsement may be a signature authorizing the legal transfer of a negotiable instrument between parties or it can be an amendment to a contract or document such as a life insurance policy or a driver s license a public declaration of support for a person product or service is also called an endorsement investopedia paige mclaughlinunderstanding endorsementswhile endorsement has several distinct meanings many of them have to do with the concept of approval or authorization in business or legal matters an endorsement refers to a signature or an equivalent stamp that authorizes payment or a transfer of funds or other financial transaction it also refers to a note amendment or clause to an official document or contract that modifies or specifies terms in a more general context an endorsement is an act of saying or showing that you agree with or support something or someone the endorser may or may not be compensated for example a wnba basketball player may endorse a pair of nike brand shoes in a commercial or an actor might endorse a political candidate appearing at campaign rallies or making speeches types of endorsementsa signature is an endorsement for example when an employer issues a payroll check it authorizes or endorses the transfer of money from the business account to the employee the act of signing the check is considered an endorsement which serves as proof of the payer s intent to transfer funds to the payee in a financial transaction where one party pays with a check the person receiving the funds must endorse the check with a signature a signature on the back of the check indicates that the transaction is complete and allows the transfer of money ordered by the check if more than one person is listed as a payee on the check then the endorsement requirements differ depending on how the names are written for example if the check is written out to john doe and jane doe both people must sign the check if the check is written out to john doe or jane doe then only one signature is required 1signing the back of a check to be cashed is called a blank endorsement anyone can cash or deposit a check with a blank endorsement even if the check is not written to that individual insurance endorsements are amendments in the form of modifications or additions to the original policy for example a policy provision continuing monthly income to a beneficiary after the death of the insured is an example of an endorsement and is also known as a rider typically this type of endorsement increases the policy premium due to the added benefits to the policyholder and beneficiary and the increased risk to the insurer 2license endorsements add rights or privileges to a driver for example a motorcycle endorsement on a license gives a driver permission to operate a motorcycle on public roads license endorsements also refer to the types of authorized vehicles or to the type of cargo a vehicle may carry the opposite of a license endorsement is a restriction which forbids certain behavior when driving for example someone with a corrective eyewear restriction isn t allowed to drive without glasses or contact lenses 3endorsements and promotingendorsements can also represent a show of support or a form of approval a person or entity may make a public declaration of support for a person product or service most commonly such an endorsement occurs when a government official an influential person or an organization expresses their support for a political candidate in the u s one of the earliest sports celebrities paid endorsers was honus wagner national league batting champion in 1900 1903 and 1904 in 1905 he signed a contract to promote louisville slugger baseball bats he began his career playing for the louisville colonels wagner went on to endorse other products like gum soda and razors 4 but when american tobacco created a baseball card with his likeness on it to put in their cigarette packs he asked them to stop although wagner chewed tobacco he did not want children buying smokes to get his card 5for example a newspaper may recommend that readers vote for a particular person who is running for office in an upcoming election publishing an editorial that explains the reasons for their support the paper is said to be endorsing that candidate in the field of marketing supporters or promoters of products are sometimes called influencers often times influencers leverage social media to market the objects of their support 6 | |
what is an endorsement with respect to insurance | in insurance an endorsement is also known as a rider and is an amendment that adds to or modifies the original policy | |
what are other kinds of endorsements | the signature on the back of a check is an endorsement that authorizes the transfer of funds a public statement approval for a product or person running for office is another kind of endorsement | |
how do you endorse a check | simply by signing it on the back that s the short answer to how to endorse a check that said there are several variations on the check endorsement theme if you just scrawl your signature on the reverse it s known as a blank endorsement and anyone can present the check for payment if you add the words for deposit only beneath your signature a special endorsement it limits the check funds to being put into an account if you further add an account number a restrictive endorsement it limits the check from going to a specific account in this era of digital banking many institutions require checks to be marked as mobile deposits when you endorse them for further security the bottom linean endorsement is an amendment or special clause to a document or contract an authorizing signature or a public declaration of support specific types include insurance signature and license endorsements endorsements also have a commercial meaning when someone often a celebrity or public figure is paid to promote or support a product this sort of endorsement is centuries old evolving into the social media influencers of contemporary times | |
what is an endowment | an endowment is a gift to a nonprofit organization to be used for a specific purpose the term endowment is also used to refer to the total investable assets of a nonprofit institution like a university the endowment also known as the institution s principal or corpus is used for operations or programs that are consistent with the wishes of the donor s most endowments are designed to keep the principal amount intact while the income is used to further the cause specified by the beneficiary a restricted endowment must be held in perpetuity with only the income available for spending 1understanding endowmentsendowments are typically organized as a trust private foundation or public charity 23 many benefit educational institutions others go to cultural institutions such as museums libraries religious organizations private secondary schools and service oriented organizations such as retirement homes or hospitals 4in some cases only a certain percentage of an endowment s assets can be used each year so the amount withdrawn from the endowment could be a combination of interest income and principal 5 the ratio of principal to income can change year to year based on prevailing market rates policies of endowmentsendowment funds are governed by the guidelines of three components including an investment policy a withdrawal policy and a usage policy the investment policy lays out which types of investments a manager is permitted to make and dictates how much risk the manager can take in seeking the target return many endowment funds have specific investment policies built into their legal structure so that the pool of money lasts for the long term 6the endowment funds of larger universities can have hundreds if not thousands of smaller funds that invest pools of money in various securities or asset classes the funds typically have long term investment goals such as a specific rate of return or yield the asset allocation or mix of investments within the fund is designed to meet the long term returns in the fund s objectives 6the withdrawal policy establishes the amount the organization or institution is permitted to take out from the fund at each period or installment the withdrawal policy can be based on the needs of the organization and the amount of money in the fund however most endowments have an annual withdrawal limit for example an endowment might limit the withdrawals to 5 of the total amount in the fund most university endowments are established to last forever and therefore have annual spending limits 7the usage policy establishes the purposes for which the fund can be used endowments whether set up by an institution or given as a gift by donors can have multiple uses these include ensuring the financial health of specific departments awarding merit scholarships or fellowships or providing other financial assistance to students 89university chair positions or endowed professorships can be paid with the revenue from an endowment freeing up capital that can be used to hire more faculty these chair positions are considered prestigious and are reserved for senior faculty 10endowments can also be established for specific disciplines departments or programs within universities smith college for example has an endowment for its botanical gardens and harvard university has more than 14 000 separate endowment funds 1112endowment typesthere are four types of endowments 13the terms of endowments can be violated only in exceptional circumstances if an institution is facing bankruptcy but still has assets in endowments a court can issue a cy pres doctrine allowing the institution to use those assets to improve its financial health while still honoring the wishes of the donor as closely as possible 15drawing down the corpus of the endowment to pay debts or operating expenses is known as invading or endowment fund invasion and sometimes requires court approval 16requirements for endowmentsmanagers of endowments have to deal with the push and pull of interests to make use of assets to forward their causes or sustainably grow their institutions the goal of any group given the task of managing a university s endowments is to sustainably grow the funds by reinvestment of the endowment s earnings while contributing to the institution philanthropies a category that includes most grant making foundations are required by federal law to pay out 5 of their investment assets on their endowments every year for charitable purposes at the risk of losing their tax exempt status 17 private operating foundations must pay substantially all 85 or more of their investment income 18 community foundations have no requirement 19under the tax cuts and jobs act of 2017 substantially large university endowments must pay a tax of 1 4 on net investment income this tax is levied on endowments held by private colleges and universities with at least 500 students and net assets of 500 000 per student 20endowments and higher educationendowments are such an integral part of u s academia that the size of a school s endowment can be a fair measure of its well being they provide colleges and universities with the ability to fund their operating costs with sources other than tuition and provide a rainy day fund 13older educational institutions such as the ivy league schools have been particularly successful in building extremely robust endowment funds having the advantages of continued donations from wealthy graduates and good fund management 21marcus aurelius established the first recorded endowment circa 176 ad for the major schools of philosophy in athens greece 22criticism of endowmentsharvard and other elite colleges have come under criticism for the size of their endowments critics have questioned their utility likening it to hoarding 23large endowments had been thought of as rainy day funds for educational institutions but during the great recession many endowments cut their payouts a 2014 study published in the american economic review looked closely at the incentives behind this behavior and found a trend toward an overemphasis on the health of an endowment rather than the institution as a whole 24it s not unusual for student activists to look with a critical eye at where their colleges and universities invest their endowments in 1977 hampshire college divested from south african investments in protest of apartheid a move that a large number of educational institutions in the united states followed 25more recently three universities with multibillion dollar endowments harvard princeton and stanford declined to accept millions they were set to receive as part of a 14 billion federal aid package for higher education included in the cares act 26 harvard university has now declined emergency covid 19 relief money from the federal government three times most recently 25 5 million from president biden s american rescue plan 27real world examples of endowmentsthe oldest endowments still active today were established by king henry viii and his relatives his grandmother countess of richmond established endowed chairs in divinity at oxford and cambridge while henry viii established professorships in a variety of disciplines at oxford and cambridge 2829according to the national center for education statistics article the top 10 u s universities by endowment size in 2023 were 21harvard officials had expected the endowment to shrink in 2020 due to the impact of the pandemic on the economy and financial markets 30 they were wrong though as it returned 7 3 on its investments and actually increased a bit 31similar fears about 2021 proved even more unfounded powered by a rising stock market the endowment returned a whopping 33 6 on its investments and grew by 11 3 billion to 53 2 billion 32the fund treaded water more recently returning 1 8 in fiscal 2022 and 0 1 in fiscal 2023 32there are thousands of specific funds within the overall endowment fund for harvard the funds asset allocation was spread out through various types of investments including 32the endowment s annual payout rate is typically capped harvard s payout in 2023 totaled 2 2 billion 33from an investment perspective harvard s endowment fund has consistently produced strong returns over the long term although ongoing infusions of capital in the form of new endowments also drive total growth | |
where do endowments get their money | the endowment of a university or other nonprofit institution may be made up of many individual donations each called an endowment harvard s total endowment is more than 50 billion that fund is made up of many individual gifts each of which comes with its own rules for example an individual donor may contribute a sum of money to be used strictly to fund research by the graduate department of anthropology in most cases the administrators of endowments spend only the investment income on an endowment not the principal of the gift that is a common stipulation of many endowments who manages endowments an institution that has an endowment may have an internal financial manager or hire an outside firm to manage the money in either case the board of trustees of the institution sets in place the rules for investing and spending the money 34who is eligible for an endowment an endowment is by definition a gift to a non profit institution any educational charitable religious or scientific institution can be the recipient of an endowment generally creators of endowments are high net worth individuals or groups who want to contribute to a particular cause the endowment allows them to be highly specific about how they want their money to be used the bottom linesome of the most prestigious universities in the u s have endowments of fabulous size that may well annoy some of their students who are paying hefty tuition fees to study there but for better or worse endowments can t be used to reduce everyone s tuition or even to keep the lights on endowments are made up of many specific gifts from individuals and groups that specify their uses they may underwrite certain research create a scholarship or fund a chair endowments are meant to last in perpetuity only the investment returns not the underlying assets are spent from year to year | |
what is the endowment effect | the endowment effect refers to an emotional bias that causes individuals to value an owned object higher often irrationally than its market value understanding the endowment effectin behavioral finance the endowment effect or divestiture aversion as it is sometimes called describes a circumstance in which an individual places a higher value on an object that they already own than the value they would place on that same object if they did not own it this type of behavior is typically triggered with items that have an emotional or symbolic significance to the individual however it can also occur merely because the individual possesses the object in question example of the endowment effectlet s look at an example an individual obtained a case of wine that was relatively modest in terms of price if an offer were made at a later date to acquire that wine for its current market value which is marginally higher than the price that the individual paid for it the endowment effect might compel the owner to refuse this offer despite the monetary gains that would be realized by accepting the offer so rather than take payment for the wine the owner may choose to wait for an offer that meets their expectation or drink it themselves the actual ownership has resulted in the individual overvaluing the wine similar reactions driven by the endowment effect can influence the owners of collectible items or even companies who perceive their possession to be more important than any market valuation under the restrictive assumptions of rational choice theory which undergirds modern microeconomic and finance theory such behavior is irrational behavioral economists and behavior finance scholars explain such allegedly irrational behavior as a result of some sort of cognitive bias that warps the individuals thinking according to these theories a rational individual should value the case of wine at exactly the current market price since they could purchase an identical case of wine at that price if they were to sell or otherwise give up the case that they own already the endowment effect makes investors hold onto specific securities longer than they should without a clear exit plan investors are strongly susceptible to the endowment effect the endowment effect triggersresearch has identified two main psychological reasons as to what causes the endowment effect the endowment effect impactpeople who inherit shares of stock from deceased relatives exhibit the endowment effect by refusing to divest those shares even if they do not fit with that individual s risk tolerance or investment goals and may adversely impact a portfolio s diversification determining whether or not the addition of these shares negatively impacts the overall asset allocation is appropriate to reduce negative outcomes the endowment effect bias applies outside of finance as well a well known study that exemplifies the endowment effect and has been replicated successfully starts with a college professor who teaches a class with two sections one that meets mondays and wednesdays and another that meets tuesdays and thursdays the professor hands out a brand new coffee mug with the university s logo emblazoned on it to the monday wednesday section for free as a gift not making much of a big deal out of it the tuesday thursday section on the other hand receives nothing a week later the professor asks all of the students to value the mug the students who received the mug on average put a greater price tag on the mug than those who did not when asked what would be the lowest selling price of the mug the mug receiving students quote was consistently and significantly higher than the quote from the students who did not receive a mug the endowment effect and marketingmany companies strive to exploit the endowment effect for their benefit for instance they may devise strategies that attract customers then leverage the endowment effect knowing it will be difficult for a consumer to leave for example consider how companies can offer free trials to consumers to try their products when people try a product they may become attached to it and see it as something they own making them more likely to purchase it this same emotion may be felt during limited time offers where consumers are faced with a sense of urgency to buy a product then forge a relationship with that good companies often personalize products or services to make consumers feel a sense of ownership over them this is done to enhance a sense of ownership and attachment this same attachment can be felt through loyalty programs that offer rewards or incentives for repeat purchases last companies often leverage social media to substantiate and prove how other users are attached to their products those that see this messaging may resonate with how other people are emotionally attached to goods and further enhance their own relationships consider whether or not you would buy something you already own if you wouldn t but aren t willing to sell the item perhaps you overvalue something you currently own | |
how to avoid the endowment effect | an investor must be mindful in order to avoid the endowment effect they must take deliberate action or take care to understand the assets they hold and the emotional ties they have to the goods first investors must have a clear investment strategy having a clear investment strategy can help investors make objective decisions about when to buy and sell investments by having a plan in place investors can avoid getting emotionally attached to individual investments to make objective decisions it s important to have clear criteria for when to buy and sell investments this could include setting a target price a time horizon or specific performance metrics because it may be harder to sell the winners investors must have a specific plan in place and not get caught up in prior performance though an investor can always change the criteria it uses to buy and sell investors are more susceptible to endowment risk should they not have a clear goal investors should also continually review and rebalance their portfolio by continually reviewing the investments within a portfolio investors can more closely understand how the investment moves and strive to not be as emotionally attached this also works to emphasize portfolio diversification if an investor analyzes an investment as part of a larger portfolio the investor can understand why an investment is being held and why it may be good time to sell | |
how does the endowment effect effect buyers | the endowment effect doesn t just impact sellers buyers are often more willing to sell items for more money than what they would buy that same item for for this reason there is naturally dissonance between the prices offered and prices sought after for many types of trades | |
why is it called the endowment effect | the term endowment effect was first used by the economist richard thaler it was used in reference to the inertia related to consumer choices when goods included in their endowment were more highly valued than goods that were not | |
what is the opposite of the endowment effect | a phenomenon known as the reversed endowment effect is the opposite of the endowment effect this term is used to describe a situation where people tend to have a preference to be rid of an undesirable item in exchange for an equally undesirable item | |
is endowment effect a cognitive bias | yes the endowment effect is a cognitive bias that impacts how individuals feel about the goods they already possess there is little to no rational in the endowment effect as goods of equal value may not be seen or treated as such because of this cognitive bias the bottom linethe endowment effect is a term used to describe how individuals place more value in certain items often things they own compared to items they do not own this cognitive bias often translates to people being willing to sell at higher prices and buy at lower prices for goods of equal value investors can overcome the endowment effect by having a clear investment plan including an exit strategy and overarching portfolio goal | |
what is energy return on investment eroi | energy return on investment eroi is a ratio for describing a measure of energy produced in relation to the energy used to create it for instance the ratio would illustrate how much energy is used to locate extract deliver and refine crude oil relative to how much useable energy is created the energy return on investment eroi is a key determinant of the price of energy because sources of energy that can be tapped relatively cheaply will allow the price to remain low understanding energy return on investmenteroi is important because if the cost of an energy plant is more than the revenues gained from selling electricity that plant is not economically viable eroi can also help organizations and governments compare different energy sources for profitability such as nuclear vs solar power | |
when the eroi is large that means that producing energy from that source is relatively easy and cost effective however when the number is small obtaining energy from that source is difficult and expensive for example when the ratio is 1 there is no return on energy invested according to the world nuclear association the break even number is 7 | in its simplest form eroi is calculated as however there are dramatic differences in how certain steps of the input process are measured this measurement is complex because the inputs are diverse and there is uncertainty as to how far back they should be taken in the analysis in addition to energy costs there are other external costs that need to be considered with respect to energy production such as those associated with the environment and people s health generally we can expect that the highest available eroi energy sources will be used first because these offer the most energy for the least effort a net energy gain is achieved by expending less energy when attempting to acquire and use a source of energy eroi analysis is considered part of a life cycle analysis types of energy sources where eroi is measuredthere are a number of consumable energy sources where eroi is determined for efficiency and cost analysis these energy sources include oil biofuels geothermal energy nuclear fuels coal solar wind and hydroelectric the average eroi across all generating technologies is about 40 for the united states according to the world nuclear association pages cited above the association cites a study by weissback et al 2013 which states that the results show that nuclear hydro coal and natural gas power systems in this order are one order of magnitude more effective than photovoltaics and wind power according to the u s energy information administration fossil fuels such as coal petroleum and natural gas have been the major sources of energy since the late 1800s until the 1990s hydropower and solid biomass were the most used renewable energy resources since then the amount of energy coming from biofuels solar and wind energy has increased the eroi for oil has decreased dramatically over the past hundred years the amount of energy required to produce one barrel of oil has decreased as more efficient methods such as fracking have been introduced | |
what is an energy risk professional erp | energy risk professional erp is a professional designation awarded by the global association of risk professionals garp to individuals who work in the oil coal natural gas and alternative energy industries as of 2021 the designation will no longer be offered understanding an energy risk professional erp people seeking this designation must complete a rigorous self study program pass a 180 question eight hour exam have at least two years of qualifying work experience and agree to the global association of risk professionals professional code of conduct successful applicants earn the right to use the energy risk professional erp designation with their names which can improve job opportunities professional reputation and pay the energy risk professional erp program is developed by seasoned energy professionals to teach applicants about real world scenarios garp announced in 2020 that 2021 will be the last year the erp exam will be offered as interest in the erp designation has decreased according to a study by the organization as a result it will no longer be possible to obtain an energy risk professional erp designation 1 attributes of an energy risk professional erp the study program to become an energy risk professional erp covers physical energy markets financial trading instruments valuation and structuring of energy transactions risk management in financial trading financial disclosure accounting and compliance individuals with the energy risk professional erp designation may work for banks academic institutions consulting firms asset management firms and a wide variety of other organizations concerned with energy risk the designation equates to a specific degree level for example the erp designation is equivalent to an american master s degree the regulated qualifications framework level 7 in the united kingdom the ontario qualifications framework level 12 in canada and the hong kong qualifications framework level 6 in hong kong degree equivalents also apply in the european union singapore australia india the united arab emirates and south africa 2 to maintain the erp designation members must participate in the continuing professional development crp program this program ensures that professionals remain knowledgeable about industry trends developments and best practices available to members are podcasts training courses and articles the energy risk professional erp examthe energy risk professional erp exam is taken to earn the erp designation it is designed to measure a candidate s knowledge of the major energy markets and gauge their ability to manage the physical and financial risks inherent in the complex world of energy the exam provides a comprehensive overview of all major energy markets including the upstream and downstream processes associated with each the trading and structuring of diverse energy commodities and the identification measurement and management of key physical and financial risks candidates must successfully pass two multiple choice exams erp exam part i and erp exam part ii part i consists of 80 questions to be completed within four hours this exam consists of questions testing the candidate s knowledge of physical energy commodity markets part ii consists of 60 questions also to be completed within 4 hours part ii evaluates the test takers knowledge of the application of energy derivatives and risk mitigation additional exam details | |
what the energy risk professional erp exam covers | part i of the exam focuses on the following part ii of the exam focuses on the following | |
what is the energy sector | the energy sector is a category of stocks that relate to producing or supplying energy the energy sector or industry includes companies involved in the exploration and development of oil or gas reserves oil and gas drilling and refining the energy industry also includes integrated power utility companies such as renewable energy and coal 12understanding the energy sector the energy sector is a large and all encompassing term that describes a complex and interrelated network of companies directly and indirectly involved in the production and distribution of energy needed to power the economy and facilitate the means of production and transportation companies within the energy sector are involved in various types of energy for the most part energy companies are categorized based on how the energy that they produce is sourced and will typically fall into one of two categories the energy industry also includes secondary sources such as electricity 4 energy prices along with the earnings performance of energy producers are largely driven by the supply and demand for worldwide energy oil and gas producers tend to perform well during periods of elevated oil and gas prices however energy companies earn less when the price of energy commodities falls oil refiners on the other hand benefit from the falling cost of feedstock to produce petroleum products like gasoline when crude oil prices drop furthermore the energy industry is sensitive to political events which historically have led to volatility wild fluctuations in the price of oil some of the largest companies in the u s energy sector include exxon mobil xom and chevron cvx both of which are large international integrated oil companies in 2020 peabody energy btu was america s largest coal producer measured by tons of output 5in 2021 petroleum 36 was the most consumed energy source in the u s followed by natural gas 32 renewable energy 12 coal 11 and nuclear electric power 8 3types of energy sector companiesbelow are some of the types of companies found in the energy industry each has a distinct role to play in bringing energy to businesses and consumers these are the companies that drill pump and produce oil and natural gas production typically involves pulling oil out of the ground oil and natural gas must be delivered from the production site to a refinery to be refined into a final product such as gasoline companies within this portion of the energy sector are called midstream providers coal companies can be classified as energy companies since coal is used to power plants including nuclear clean energy has gained traction and investment dollars over the years and is likely to be a growing part of the energy sector in the future examples of renewable energy include wind and solar some companies specialize in refining oil and gas into specialty chemicals although many larger oil producers such as exxon mobil are integrated energy producers meaning they produce multiple types of energy and control the entire process the infrastructure investment and jobs act of 2021 provides support for parts of the energy industry in particular part of the 550 billion in funding will be allocated to electric grid infrastructure and power lines as well as expanding clean energy 6 examples of energy sector investmentsinvestors have numerous choices in the energy industry including equities of energy companies mutual funds and etfs as well as the ability to buy the commodities exchange traded funds etfs are a basket of investments such as stocks that track an underlying index mutual funds on the other hand are a portfolio of stocks or investments that are selected and managed by a portfolio manager there are a number of energy related etfs that can give retail investors exposure to the energy industry investors can choose which part of the value chain they want with any number of funds below are a few examples of energy etfs | |
what is the energy sector responsible for | the energy sector plays a crucial role in the economy aside from powering homes transportation and factories energy sources are also a component in many of the products we use on a daily basis | |
which are the main energy sectors | the global industry classification standard gics breaks down the energy sector into two industries energy equipment and services and oil gas and consumable fuels there are then various sub sectors | |
what is the difference between the energy sector and the utility sector | the energy sector primarily consists of companies that play a role in extracting refining or producing sources of energy utility companies on the other hand focus on providing their customers with electricity water and other public utilities both of these sectors offer customers electricity in some way however their roles are different with the components of the energy sector responsible for providing the energy that utility companies then sell to the public the bottom linethe energy sector is a vast one it covers various energy sources including natural gas electricity petroleum coal and renewable sources and phases of getting energy to market from extraction all the way to transportation of the finished product and marketing this means the companies classified as belonging to the energy sector have prospects that can differ considerably essentially the only thing that ties them all together is that they are responsible in some way for bringing a form of energy to market the energy sector employs many individuals with advanced degrees in engineering and geology the growth in alternative energy also requires the skills of those with advanced biology and technological degrees | |
what is an engagement letter | an engagement letter is a written agreement that describes the business relationship to be entered into by a client and a company the letter details the scope of the agreement its terms and costs the purpose of an engagement letter is to set expectations on both sides of the agreement | |
how an engagement letter works | a letter of engagement serves the same purpose as a contract between two parties however its format is less formal than a contract and it generally avoids legal jargon 1the letter is intended to briefly but accurately describe a letter of engagement is a legal document it is binding in a business deal an engagement letter is less formal than a contract but still a legally binding document that can be used in a court of law 1an engagement letter also serves to limit the scope of the company s services for example when an individual or business secures the services of an attorney the letter might describe the specific purpose or area of expertise in which their services can be used a contractor who hires an attorney to draw up a land purchase cannot call the attorney for advice about his divorce most likely the engagement letter will not state that fact outright but the meaning will be clear because it will specify the scope of work to be undertaken an engagement letter doesn t become legally binding until it is signed by all parties advantages of an engagement lettersetting expectations is an important part of a business relationship and an engagement letter makes these expectations clear on both sides the client gets the reassurance of knowing when a service will be completed how much it will cost and the specifics of the scope of work the letter also makes it clear if other costs are involved that are not covered in the agreement such as required software that must be purchased separately by the client the business benefits from having clear boundaries regarding the work that will be performed from the beginning of the project this is intended to prevent scope creep something that every tax accountant and attorney dreads the letter may also cite services that lie outside the current agreement but may be added in the future as needed with an estimate of the costs of these additions an engagement letter also protects both parties in the event of a dispute or disagreement it may include a clause regarding mediation or binding arbitration as a first step rather than legal action special considerationsif the relationship is long term many companies require their engagement letter to be updated and signed again by the client annually this allows for any changes in the business relationship over time and strengthens the legal standing of the document it also reiterates the scope of the agreement which can change over time and establishes any new costs or fees related to changes in services provided who prepares a letter of engagement an engagement letter is drafted by the company rendering the service often with the help of a lawyer it is than presented to the client and both parties must sign in order for it to be legally binding | |
is an engagement letter the same as a contract | engagement letters are less formal and generally shorter than a traditional contract however they also share some important traits such as being legally binding and designed to reduce liability they can be used by any size business from individuals who are sole proprietors to large corporations | |
when should an engagement letter be sent | engagement letters need to be presented to the client at the beginning of the relationship before work commences they should also periodically be reissued especially when the scope of services changes or if the business changes its prices | |
how often should engagement letters be updated | many companies will require their engagement letter to be updated and signed on an annual basis a new one should always be issued if the scope of services changes however even if the agreement remains the same it can still be wise to redraft an engagement letter to increase the legal standing of the document this can also prevent miscommunication or disputes an updated draft of the letter helps to remind both parties what work has been agreed on the bottom linecompanies offering a service can face all sorts of problems if they don t lay out their expectations and boundaries in a written legally binding contract an engagement letter is similar to a contract but generally shorter and less formal however it is equally binding to both parties engagement letters help protect firms from lawsuits while offering customers clarity over what services they can expect when those services will be done and at what cost they can help both the business and client avoid misunderstandings legal disputes and scope creep ensuring that everyone involved is on the same page | |
what is engel s law | engel s law is an economic theory put forth in 1857 by ernst engel a german statistician it states that the percentage of income allocated for food purchases decreases as a household s income rises while the percentage spent on other things such as education and recreation increases understanding engel s lawin the mid 19th century ernst engel published a study based on the expenditures of belgian families he divided them into three groups on relief poor but independent and comfortable he then broke down their expenditures for food clothing housing education recreation and other spending categories 1engel found that the poorer the group the greater the percentage of their budget that went to food while a lesser percentage went for example to clothing and education that finding soon became known as engel s law english translations of engle s law vary slightly but are usually expressed as either the poorer a family the greater the proportion of its total expenditure that must be devoted to the provision of food 2or the poorer is a family the greater is the proportion of the total outgo which must be used for food the proportion of the outgo used for food other things being equal is the best measure of the material standard of living of a population 1engel s insight was extended to whole countries by arguing that the wealthier a nation the smaller the proportion of its labor and capital that will have to go toward food production and the more it can devote to manufacturing and services resulting in a more advanced economy 3engel s law todayengel s law remains a fundamental principle of economics today and underlies many economic and social policies around the world including anti poverty programs in the 20th and 21st centuries expenditure categories have grown to include many things that weren t around in engel s day automobiles health insurance and mobile phones for example but the principle remains the same once families have met their food needs they have money to spend on other things some of which education for example may lead to even greater financial security and affluence example of engel s lawsuppose a family with an annual household income of 50 000 spends 25 of their income on food or 12 500 if their income doubles to 100 000 it is unlikely that they will spend 25 000 25 on food although they may spend somewhat more than they had been spending as the late mit economist paul a samuelson points out in his widely used college textbook economics as income increases expenditures on many food items go up people eat more and eat better they shift away from cheap bulky carbohydrates to more expensive meats and proteins and to milk fruit vegetables and labor saving processed foods there are however limits to the amount of money that people will spend on food when their incomes rise | |
what is an engel curve | an engel curve is a graphic representation of engel s law showing the relationship between household income and spending on a particular good or service 4 | |
what is engel s coefficient | the engel coefficient based on engel s law is a commonly used measure of a nation s standard of living some countries also use it to set their poverty line the coefficient is arrived at by dividing food expenditures by total expenditures 5 | |
what is income elasticity | income elasticity of demand is a measure of how demand for a particular product or service will rise as income rises luxury products for example have a higher elasticity of demand than so called normal goods like food some items referred to by economists as inferior goods see a decline in demand as income rises the bottom lineengel s law states that as a household s or a nation s income rises the percentage of income spent on food decreases and the percentage spent on other goods and services increases developed in the mid 19th century by the german statistician ernst engel it remains influential in economics and public policy today | |
what is enhanced oil recovery eor | enhanced oil recovery eor also known as tertiary recovery is a process for extracting oil that has not already been retrieved through the primary or secondary oil recovery techniques although the primary and secondary recovery techniques rely on the pressure differential between the surface and the underground well enhanced oil recovery functions by altering the chemical composition of the oil itself in order to make it easier to extract | |
how enhanced oil recovery works | enhanced oil recovery techniques are complex and expensive and therefore are employed only when the primary and secondary recovery techniques have exhausted their usefulness indeed depending on factors such as the cost of oil it may not be economical to employ eor at all in those cases oil and gas might be left in the reservoir because it is simply not profitable to extract the remaining amounts three main types of eor techniquesin the first type of technique gases are forcefully injected into the well in a way that both forces the oil to the surface and reduces its viscosity the less viscous the oil the easier it flows and the more cheaply it can be extracted although various gases can be used in this process carbon dioxide co2 is used most often this specific use of carbon dioxide likely could continue or even increase in the future as recent advances make it possible to transport co2 in the form of foams and gels to some this could be a significant improvement as it would allow co2 injections to be utilized in areas far removed from naturally occurring carbon dioxide reservoirs on the other hand there are grave concerns about the continued use of carbon dioxide because of its harmful effects on the environment currently most countries are seeking alternative modes of energy that are more sustainable than co2 other common eor techniques include pumping steam into the well in order to heat the oil and make it less viscous similar outcomes can be achieved through so called fire flooding which involves lighting a fire around the periphery of the oil reservoir in order to drive the remaining oil close to the well finally various polymers and other chemical structures can be injected into the reservoir to reduce viscosity and increase pressure although these techniques are often prohibitively expensive using enhanced oil recovery methodspetroleum companies and scientists look to eor for its potential to prolong the life of wells in proven or probable oil fields proven reserves are those with a greater than 90 chance that oil will be recovered and probable reserves have a more than 50 chance of recovering petroleum unfortunately eor techniques can produce negative environmental side effects such as causing harmful chemicals to leak into the groundwater one recent technique that might help reduce these environmental risks is called plasma pulsing developed in russia plasma pulse technology involves radiating oil fields with low energy emissions thereby lowering their viscosity much like conventional eor techniques because plasma pulsing does not require injecting gases chemicals or heat into the ground it may prove to be less environmentally harmful than the other current methods of oil recovery | |
what is an enrolled agent | an enrolled agent ea is a tax professional authorized by the united states government to represent taxpayers in matters regarding the internal revenue service irs eas must pass an examination or have sufficient experience as an irs employee and pass a background check 12 enrolled agents first appeared in 1884 due to issues arising with civil war loss claims 3understanding enrolled agentsan enrolled agent is a federally licensed tax practitioner who has unlimited rights to represent taxpayers before the irs for any issues relating to collections audits or tax appeals according to the national association of enrolled agents naea the organization that represents licensed eas they are allowed to advise represent and prepare tax returns for people corporations partnerships estates trusts and anything else that is required to report to the irs 4history of enrolled agencyin the 1880s there were inadequate attorney standards and ccertified public accountants cpas were not in existence the enrolled agent profession began after fraudulent claims were submitted for civil war losses congress took action to regulate eas to prepare civil war claims and represent citizens in their interactions with the treasury department in 1884 the horse act was signed into law by president chester arthur to establish and standardize enrolled agents 3in 1913 when the 16th amendment was passed ea duties expanded to include tax preparation and resolving taxpayer disputes with the irs in 1972 a group of enrolled agents collaborated to form the naea to represent the interests of eas and increase the professional development of its members 3requirements of enrolled agentseas are not required to get college degrees some former irs employees with five years of taxation experience may apply to become an enrolled agent without taking the exam non exempt persons must take and pass the special enrollment examination see all enrolled agents must complete 72 hours of continuing education every 36 months 5 cpas and attorneys may serve as enrolled agents without taking the exam 6enrolled agents are the only tax professionals who do not require a state license however they have a federal license and can represent a taxpayer in any state 4 they must abide by the specifications of the treasury department s circular 230 which provides the guidelines governing enrolled agents 7 enrolled agents that have an naea membership are also subject to a code of ethics and rules of professional conduct 8benefits of using an enrolled agentnaea members must complete 30 hours per year of continuing education or 90 hours every three years which is significantly more than the irs prerequisite enrolled agents offer tax planning tax preparation and representation services for businesses and individuals 4 enrolled agents vs other tax professionalsenrolled agents are required to prove their proficiency in every aspect of taxes ethics and representation unlike cpas and attorneys who may not specialize in taxes eas are not employees of the irs in addition they cannot display their credentials when representing clients and advertising their services they cannot use the term certified as part of a title or infer an employee relationship with the irs outlook for enrolled agentsthe hiring of tax examiners is projected to decline 4 from 2020 to 2030 as the growth of the tax examiner industry is closely tied to changes in federal state and local government budgets 9 the growth of the enrolled agent industry depends on industry rule changes and the demand for tax services however there is a growing need for eas in private and public accounting firms law firms corporations local and state government agencies and banks | |
how do i become an enrolled agent | to become an enrolled agent a person must obtain a preparer tax identification number pass the special enrollment exam enroll as an agent and be deemed suitable e g background check to perform as an enrolled agent 5 former irs employees with at least 5 years of experience as field tax professionals 6 | |
what does an enrolled agent do | an enrolled agent is authorized by the u s federal government to represent taxpayers before the irs they may also serve as tax advisors planners and preparers 4 | |
how is an enrolled agent different from a cpa | while an enrolled agent ea and a certified public accountant cpa are skilled and authorized tax professionals however an enrolled agent is specifically focused on taxation whereas a cpa can specialize in taxation and other financial and accounting matters a person may be an ea and a cpa however one appointment does not necessarily qualify the person to serve as the other cpas duties and professional offerings are broader than an ea s | |
what was enron | enron was an energy trading and utility company based in houston texas that perpetrated one of the biggest accounting frauds in history enron s executives employed accounting practices that falsely inflated the company s revenues and for a time made it the seventh largest corporation in the united states once the fraud came to light the company quickly unraveled filing for chapter 11 bankruptcy in december 2001 understanding enronenron was an energy company formed in 1986 following a merger between houston natural gas company and omaha based internorth incorporated after the merger kenneth lay who had been the chief executive officer ceo of houston natural gas became enron s ceo and chair lay quickly rebranded enron into an energy trader and supplier deregulation of the energy markets allowed companies to place bets on future prices in 1990 lay created the enron finance corporation and appointed jeffrey skilling whose work as a mckinsey company consultant had impressed lay to head the new corporation skilling was then one of the youngest partners at mckinsey enron provided a variety of energy and utility services around the world its company divided operations in several major departments including however by leveraging special purpose vehicles special purpose entities mark to market accounting and financial reporting loopholes enron became one of the most successful companies in the world upon discovery of the fraud the company subsequently collapsed enron shares traded as high as 90 75 before the fraud was discovered but plummeted to around 0 26 in the sell off after it was revealed the former wall street darling quickly became a symbol of modern corporate crime enron was one of the first big name accounting scandals but uncovered frauds at other companies such as worldcom and tyco international soon followed the enron scandalbefore coming to light enron was internally fabricating financial records and falsifying the success of its company though the entity did achieve operational success during the 1990s the company s misdeeds were finally exposed in 2001 leading up to the turn of the millennium enron s business appeared to be thriving the company became the largest natural gas provider in north america in 1992 and the company launched enrononline its trading website allowing for better contract management just months before 2000 the company also rapidly expanded into international markets led by the 1998 merger with wessex water enron s stock price mostly followed the s p 500 for most of the 1990 s however expectations for the company began to soar in 1999 the company s stock increased 56 in 2000 it increased an additional 87 both returns widely beat broad market returns and the company soon traded at a 70x price earnings ratio in february 2001 kenneth lay stepped down as chief executive officer and was replaced by jeffrey skilling a little more than six months later skilling stepped down as ceo in august 2001 with lay taking over the role again around this time enron broadband reported massive losses lay revealed in the company s q2 2001 earnings report that in contrast to our extremely strong energy results this was a difficult quarter in our broadband businesses in this quarter the broadband services department reported a financial loss of 102 million also around this time lay sold 93 000 shares of enron stock for roughly 2 million while telling employees via e mail to continue buying the stock and predicting significantly higher stock prices in total lay was eventually found to have sold over 350 000 enron shares for total proceeds greater than 20 million during this time sherron watkins had expressed concerns regarding enron s accounting practices a vice president for enron she wrote an anonymous letter to lay expressing her concerns watkins and lay eventually met to discuss the matters in which watkins delivered a six page report detailing her concerns the concerns were presented to an outside law firm in addition to enron s accounting firm both agreed there were no issues to be found by october 2001 enron had reported a third quarter loss of 618 million enron announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations enron s 63 4 billion bankruptcy was the biggest on record at the time on nov 28 2001 credit rating agencies reduced enron s credit rating to junk status effectively solidifying the company s path to bankruptcy on the same day dynegy a fellow energy company enron was attempting to merge with decided to nix all future conversations and opted against any merger agreement by the end of the day enron s stock price had dropped to 0 61 enron europe was the first domino filing for bankruptcy after close of business on nov 30 the rest of enron followed suit on dec 2 early the following year enron dismissed arthur andersen as its auditor citing that the auditor had yielded advice to shred evidence and destroy documents in 2006 the company sold its last business prisma energy the next year the company changed its name to enron creditors recovery corporation with the intention of repaying any remaining creditors and open liabilities as part of the bankruptcy process after emerging from bankruptcy in 2004 the new board of directors sued 11 financial institutions involved in helping conceal the fraudulent business practices of enron executives enron collected nearly 7 2 billion from these financial institutions as part of legal settlements the banks included the royal bank of scotland deutsche bank and citigroup kenneth lay pleaded not guilty to eleven criminal charges he was convicted of six counts of securities and wire fraud and was subject to a maximum of 45 years in prison however lay died on july 5 2006 before sentencing was to occur jeff skilling was convicted on 19 of the 28 counts of securities fraud he was charged with in addition to other charges of insider trading he was sentenced to 24 years and four months in prison though the u s department of justice reached a deal with skilling in 2013 the deal resulted in 10 years being cut off of his sentence andy fastow and his wife lea pleaded guilty to charges against them including money laundering insider trading fraud and conspiracy fastow was sentenced to 10 years without parole to testify against other enron executives fastow has since been released from prison causes of the enron scandalenron went to great lengths to enhance its financial statements hide its fraudulent activity and report complex organizational structures to both confuse investors and conceal facts the causes of the enron scandal include but are not limited to the factors below enron devised a complex organizational structure leveraging special purpose vehicles or special purpose entities these entities would transact with enron allowing enron to borrow money without disclosing the funds as debt on their balance sheet spvs provide a legitimate strategy that allows companies to temporarily shield a primary company by having a sponsoring company possess assets then the sponsor company can theoretically secure cheaper debt than the primary company assuming the primary company may have credit issues there are also legal protection and taxation benefits to this structure the primary issue with enron was the lack of transparency surrounding the use of spvs the company would transfer its own stock to the spv in exchange for cash or a note receivable the spv would then use the stock to hedge an asset against enron s balance sheet once the company s stock started losing its value it no longer provided sufficient collateral that could be exploited by being carried by an spv enron inaccurately depicted many contracts or relationships with customers by collaborating with external parties such as its auditing firm it was able to record transactions incorrectly not only in accordance with gaap but also not in accord with agreed upon contracts for example enron recorded one time sales as recurring revenue in addition the company would intentionally maintain an expired deal or contract through a specific period to avoid recording a write off during a given period many of enron s financial incentive agreements with employees were driven by short term sales and quantities of deals closed without consideration for the long term validity of the deal in addition many incentives did not factor in the actual cash flow from the sale employees also received compensation tied to the success of the company s stock price while upper management often received large bonuses tied to success in financial markets part of this issue was the rapid rise of enron s equity success on dec 31 1999 the stock closed at 44 38 just three months later it closed on march 31 2000 at 74 88 with the stock hitting 90 by the end of 2000 the massive profits some employees received only fueled further interest in obtaining equity positions in the company many external parties learned about enron s fraudulent practices but their financial involvement with the company likely caused them not to intervene enron s accounting firm arthur andersen received many jobs and financial compensation in return for their services investment bankers collected fees from enron s financial deals buy side analysts were often compensated to promote specific ratings in exchange for stronger relationships between enron and those institutions both enron energy services and enron broadband were poised to be successful due to the emergence of the internet and heightened retail demand however enron s over optimism resulted in the company over promising online services and timelines that were simply unrealistic the ultimate downfall of enron was the result of overall poor corporate leadership and corporate governance former vice president of corporate development sherron watkins is noted for speaking out about various financial treatments as they were occurring however top management and executives intentionally disregarded and ignored concerns this tone from the top set the precedent across accounting finance sales and operations in the early 1990s enron was the largest seller of natural gas in north america ten years later the company no longer existed due to its accounting scandal the role of mark to market accountingone additional cause of the enron collapse was mark to market accounting mark to market accounting is a method of evaluating a long term contract using fair market value at any point the long term contract or asset could fluctuate in value in this case the reporting company would simply mark its financial records up or down to reflect the prevailing market value there are two conceptual issues with mark to market accounting both of which enron took advantage of first mark to market accounting relies very heavily on management estimation consider long term complex contracts requiring the international distribution of several forms of energy because these contracts were not standardized it was easy for enron to artificially inflate the value of the contract because it was difficult to determine the market value appropriately second mark to market accounting requires companies to periodically evaluate the value and likelihood that revenue will be collected should companies fail to continually evaluate the value of the contract it may easily overstate the expected revenue to be collected for enron mark to market accounting allowed the firm to recognize its multi year contracts upfront and report 100 of income in the year the agreement was signed not when the service would be provided or cash collected this form of accounting allowed enron to report unrealized gains that inflated its income statement allowing the company to appear much more profitable than it was | |
what happened to enron | the enron bankruptcy at 63 4 billion in assets was the largest on record at the time the company s collapse shook the financial markets and nearly crippled the energy industry while high level executives at the company concocted the fraudulent accounting schemes financial and legal experts maintained that they would never have gotten away with it without outside assistance the securities and exchange commission sec credit rating agencies and investment banks were all accused of having a role in enabling enron s fraud initially much of the finger pointing was directed at the sec which the u s senate found complicit for its systemic and catastrophic failure of oversight the senate s investigation determined that had the sec reviewed any of enron s post 1997 annual reports it would have seen the red flags and possibly prevented the enormous losses suffered by employees and investors the credit rating agencies were found to be equally complicit in their failure to conduct proper due diligence before issuing an investment grade rating on enron s bonds just before its bankruptcy filing meanwhile the investment banks through manipulation or outright deception had helped enron receive positive reports from stock analysts which promoted its shares and brought billions of dollars of investment into the company it was a quid pro quo in which enron paid the investment banks millions of dollars for their services in return for their backing enron reported total company revenue of | |
what is enterprise multiple | enterprise multiple also known as the ev multiple is a ratio used to determine the value of a company the enterprise multiple which is enterprise value divided by earnings before interest taxes depreciation and amortization ebitda looks at a company the way a potential acquirer would by considering the company s debt what s considered a good or bad enterprise multiple will depend on the industry formula and calculation of enterprise multiple enterprise multiple ev ebitda where ev enterprise value market capitalization total debt cash and cash equivalents ebitda earnings before interest taxes depreciation and amortization begin aligned text enterprise multiple frac text ev text ebitda textbf where text ev text enterprise value text market capitalization text total debt text cash and cash equivalents text ebitda text earnings before interest taxes depreciation text and amortization end aligned enterprise multiple ebitdaev where ev enterprise value market capitalization total debt cash and cash equivalentsebitda earnings before interest taxes depreciationand amortization investopedia eliana rodgers | |
what enterprise multiple can tell you | investors mainly use a company s enterprise multiple to determine whether a company is undervalued or overvalued a low ratio relative to peers or historical averages indicates that a company might be undervalued and a high ratio indicates that the company might be overvalued an enterprise multiple is useful for transnational comparisons because it ignores the distorting effects of individual countries taxation policies it s also used to find attractive takeover candidates since enterprise value includes debt and is a better metric than market capitalization for merger and acquisition m a purposes enterprise multiples can vary depending on the industry it is reasonable to expect higher enterprise multiples in high growth industries e g biotech and lower multiples in industries with slow growth e g railways enterprise value ev is a measure of the economic value of a company it is frequently used to determine the value of the business if it is acquired it is considered to be a better valuation measure for m a than a market cap since it includes the debt an acquirer would have to assume and the cash they d receive example of how to use enterprise multipledollar general dg generated 3 86 billion in ebitda for the trailing 12 months ttm as of the year ended jan 28 2022 the company had 344 8 million in cash and cash equivalents and 14 25 billion in total debt for the same ended year 1the company s market cap was 56 2 billion as of april 4 2022 2 dollar general s enterprise multiple is 18 2 56 2 billion 14 25 billion 344 million 3 86 billion at the same time last year dollar general s enterprise multiple was 17 4 the increase in the enterprise multiple is largely a result of the near 1 billion decrease in cash on their balance sheet while ebitda decreased just around 300 million in this example you can see how the enterprise multiple calculation takes into account both the cash the company has on hand and the debt the company is liable for 1limitations of using enterprise multiplean enterprise multiple is a metric used for finding attractive buyout targets but beware of value traps stocks with low multiples because they are deserved e g the company is struggling and won t recover this creates the illusion of a value investment but the fundamentals of the industry or company point toward negative returns investors assume that a stock s past performance is indicative of future returns and when the multiple comes down they often jump at the opportunity to buy it at a cheap value knowledge of the industry and company fundamentals can help assess the stock s actual value one easy way to do this is to look at expected forward profitability and determine whether the projections pass the test forward multiples should be lower than the ttm multiples value traps occur when these forward multiples look overly cheap but the reality is the projected ebitda is too high and the stock price has already fallen likely reflecting the market s cautiousness as such it s important to know the catalysts for the company and industry | |
what is enterprise resource planning erp | enterprise resource planning erp is a platform companies use to manage and integrate the essential parts of their businesses many erp software applications are critical to companies because they help them implement resource planning by integrating all the processes needed to run their companies with a single system an erp software system can also integrate planning purchasing inventory sales marketing finance human resources and more investopedia joules garciaunderstanding enterprise resource planning erp you can think of an enterprise resource planning system as the glue that binds together the different computer systems for a large organization without an erp application each department would have its system optimized for its specific tasks with erp software each department still has its system but all of the systems can be accessed through one application with one interface erp applications also allow the different departments to communicate and share information more easily with the rest of the company it collects information about the activity and state of different divisions making this information available to other parts where it can be used productively erp applications can help a corporation become more self aware by linking information about production finance distribution and human resources together because it connects different technologies used by each part of a business an erp application can eliminate costly duplicates and incompatible technology the process often integrates accounts payable stock control systems order monitoring systems and customer databases into one system | |
how enterprise resource planning platforms work | erp has evolved over the years from traditional software models that made use of physical client servers and manual entry systems to cloud based software with remote web based access the platform is generally maintained by the company that created it with client companies renting services provided by the platform businesses select the applications they want to use then the hosting company loads the applications onto the server the client is renting and both parties begin working to integrate the client s processes and data into the platform once all departments are tied into the system all data is collected on the server and becomes instantly available to those with permission to use it reports can be generated with metrics graphs or other visuals and aids a client might need to determine how the business and its departments are performing a company could experience cost overruns if its erp system is not implemented carefully types of erp systemsthere s a number of different erp solutions that can meet a variety of business needs this list is not meant to list every single type of erp though the list is pretty comprehensive any business considering implementing an erp system should be able to find value in some of these types of systems and multiple systems may be relevant in any given situation on premises erp systems involve purchasing the software licenses and installing the erp system directly onto a company s own servers companies have full control over the system and data as it resides within their premises customization and integration with existing systems can be more extensive and this type of erp usually requires dedicated it resources for maintenance updates and security cloud erp systems are hosted on remote servers and accessed through the internet cloud erps like saas products offer better scalability allowing businesses to easily adjust resources and features as needed without significant upfront investment in hardware cloud erp systems typically have a subscription based pricing model and updates maintenance are managed by the erp provider not the company itself industry specific erp systems are tailored to meet the unique needs and requirements of particular industries these systems often include industry specific modules functionalities and best practices to address the complexities of the industry for example consider a manufacturing firm that is heavily reliant on inventory supply chain management and distribution of goods that type of erp will be vastly different than a client based erp such as a financial institution s erp an open source erp system or any open source software for that matter provides users with access to the source code this means a company can customize modify or redistribute the erp to better meet the company s needs implementing and maintaining open source erp systems may require more technical expertise and resources compared to commercial erp solutions on the other hand small business erp systems are designed specifically for the needs of small and medium sized businesses smbs these types of erp systems try to offer balance between being slightly niche while offering essential functionalities at a more affordable price point because they are less robust small business erp solutions are often easier to implement and require less customization compared to enterprise level erp systems tiered erp systems offer different levels of functionality and scalability to cater to businesses of varying sizes and complexity companies can choose the tier that best matches their current needs and budget with the option to upgrade or customize as their requirements evolve this would entail adding on modules as they become relevant i e a company that is scaling to international operations may wait to implement foreign current modules benefits of erpbusinesses employ enterprise resource planning erp for various reasons such as expanding reducing costs and improving operations the benefits sought and realized between companies may differ however some are worth noting integrating and automating business processes eliminates redundancies and improves accuracy and productivity in addition departments with interconnected processes can synchronize work to achieve faster and better outcomes some businesses benefit from enhanced real time data reporting from a single source system accurate and complete reporting help companies adequately plan budget forecast and communicate the state of operations to the organization and interested parties such as shareholders erps allow businesses to quickly access needed information for clients vendors and business partners this contributes to improved customer and employee satisfaction quicker response rates and increased accuracy rates in addition associated costs often decrease as the company operates more efficiently erp software also provides total visibility allowing management to access real time data for decision making departments are better able to collaborate and share knowledge a newly synergized workforce can improve productivity and employee satisfaction as employees are better able to see how each functional group contributes to the mission and vision of the company also menial and manual tasks are eliminated allowing employees to allocate their time to more meaningful work erp weaknessesan erp system doesn t always eliminate inefficiencies within a business or improve everything the company might need to rethink how it s organized or risk ending up with incompatible technology erp systems usually fail to achieve the objectives that influenced their installation because of a company s reluctance to abandon old working processes some companies may also be reluctant to let go of old software that worked well in the past the key is to prevent erp projects from being split into smaller projects which can result in cost overruns employing change management principles throughout the erp life cycle can prevent or reduce failures that compromise full implementation erp vs crmerp and customer relationship management crm platforms are two different types of software systems used in business at their core erp focuses on internal business processes and operations while crm is centered around managing interactions with customers and prospects erp systems are designed to integrate and automate core business functions in contrast crm systems are dedicated to managing customer relationships and interactions this can range from things like sales leads marketing campaigns customer service inquiries and contact management while the goal of erps is to streamline processes the goal of crms is to enhance customer engagement satisfaction and loyalty despite their distinct focus areas erp and crm systems often overlap in certain areas many modern erp systems include crm functionalities this integration enables businesses to synchronize customer information such as contact details purchase history and communication logs between erp and crm systems for example a crm would traditionally host a customer s purchase history by looping that into a broader erp system a company can predict when the customer will re order make sure it has sufficient quantity on hand at a specific time and make sure it has enough personnel on hand at a specific time to fulfill the potential order erp solutions providerssome familiar names are leaders in erp software oracle corp orcl originally supplied a relational database that integrated with erp software developed by sap sap before entering the broader enterprise market in a big way in the early 2000s 1 microsoft msft has long been an industry leader with many customers using multiple software applications from the company 2as cloud based solutions have grown in popularity in recent years the traditional erp industry leaders have seen challenges from upstarts such as bizowie and workwise 34erp examplesmen s grooming product maker fulton roark successfully implemented enterprise resource planning to better track inventory and financial data like many other businesses the north carolina company used spreadsheets to track inventory and accounting software to record financial data 5as the company grew its processes lagged their antiquated inventory tracking system did not account for changing costs and the accounting software could not record the metrics needed for key financial statements these breakdowns created manual processes which further compromised time and resources 5to eliminate unnecessary processes and centralize work they chose the oracle netsuite erp system immediately fulton rourk was better able to identify accounting errors related to inventory eliminate costs from employing third parties to evaluate their financial records and better report financial positions 6cadbury a global confectioner and maker of the popular chocolate cadbury egg also successfully implemented an erp system the company had thousands of systems but could not keep pace with its rapid growth and used ineffective warehouse management systems 7it implemented a system that integrated its thousands of applications standardized processes and restructured warehouse management systems breaking down silos for seamless integrated coordination of work 8tips for choosing an erp system | |
what is enterprise resource planning | enterprise resource planning or erp is an interconnected system that aggregates and distributes information across a company the goal of an erp system is to communicate relevant information from one area of a business to another for example an erp system could automatically notify the purchasing department when the manufacturing department begins to run low on a specific type of raw material | |
what is the importance of enterprise resource planning | enterprise resource planning software offers single system solutions that integrate processes across the business these applications allow users to interact within a single interface share information and enable cross functional collaboration they increase productivity collaboration and efficiency | |
what are the 5 components of erp | the components of an erp system depend on the organization s needs however there are key features that each erp should include generally packages include finance human resource logistics and manufacturing supply chain management and customer relationship management | |
which ones are the main applications depends on the business and the industry it operates in most companies can benefit from supply chain management logistics and financial applications to help them streamline their operations and expenses | the bottom lineenterprise resource planning erp manages and integrates business processes through a single system with a better line of sight companies can better plan and allocate resources without erp companies tend to operate in silos with each department using its own disconnected system erp systems promote the free flow of communication and sharing of knowledge across an organization the integration of systems for improved productivity and efficiencies and increased synergies across teams and departments however moving to an erp system will be counterproductive if the company s culture does not adjust to the change and the company does not review how the structure of its organization can support it | |
what is enterprise risk management erm | enterprise risk management erm is a methodology that looks at risk management strategically from the perspective of the entire firm or organization it is a top down strategy that aims to identify assess and prepare for potential losses dangers hazards and other potentials for harm that may interfere with an organization s operations and objectives and or lead to losses understanding enterprise risk management erm enterprise risk management takes a holistic approach and calls for management level decision making that may not necessarily make sense for an individual business unit or segment thus instead of each business unit being responsible for its own risk management firm wide surveillance is given precedence it also often involves making the risk plan of action available to all stakeholders as part of an annual report industries as varied as aviation construction public health international development energy finance and insurance all have shifted to utilize erm erm therefore can work to minimize firm wide risk as well as identify unique firm wide opportunities communicating and coordinating between different business units are key for erm to succeed since the risk decision coming from top management may seem at odds with local assessments on the ground firms that utilize erm will typically have a dedicated enterprise risk management team that oversees the workings of the firm 1while erm best practices and standards are still evolving they have been formalized through coso an industry group that maintains and updates such guidance for companies and erm professionals 2erm friendly firms may be attractive to investors because they signal more stable investments a holistic approach to risk managementmodern businesses face a diverse set of risks and potential dangers in the past companies traditionally handled their risk exposures via each division managing its own business enterprise risk management calls for corporations to identify all the risks they face it also makes management decide which risks to manage actively as opposed to risks being siloed across a company a company sees the bigger picture when using erm erm looks at each business unit as a portfolio within the firm and tries to understand how risks to individual business units interact and overlap it is also able to identify potential risk factors that are unseen by any individual unit companies have been managing risk for years traditional risk management has relied on each business unit evaluating and handling its own risk and then reporting back to the ceo at a later date more recently companies have started to recognize the need for a more holistic approach 1a chief risk officer cro for instance is a corporate executive position that is required from an erm standpoint the cro is responsible for identifying analyzing and mitigating internal and external risks that impact the entire corporation the cro also works to ensure that the company complies with government regulations such as sarbanes oxley sox and reviews factors that could hurt investments or a company s business units the cro s mandate will be specified in conjunction with other top management along with the board of directors and other stakeholders a good indication that a company is working at effective erm is the presence of a chief risk officer cro or a dedicator manager who coordinates erm efforts components of enterprise risk managementthe coso enterprise risk management framework identifies eight core components that define how a company should approach creating its erm practices a company s internal environment is the atmosphere and corporate culture within the company set by its employees this sets the precedence of what the company s risk appetite is and what management s philosophy is regarding incurring risk the internal environment may be set by upper management or the board and communicated throughout an organization though it is often reflected through the actions of all employees as a company determines its purpose it must set objectives that support the mission and goals of a company these objectives must then be aligned with a company s risk appetite for example an ambitious company that has set far reaching strategic plans must be aware that there may be internal risks or external risks associated with these lofty goals in response a company can align the measures to be taken with what it wants to accomplish such as hiring additional regulatory staff for expansion areas it is currently unfamiliar with positive events may have a great impact on a company on the other hand negative events may have detrimental outcomes on a company s ability to continue to operate erm guidance recommends that companies identify important areas of the business and associated events that may have dire outcomes these high risk events may pose risks to operations e g natural disasters that force offices to temporarily close or strategic e g government regulation outlaws the company s primary product line in addition to being aware of what may happen the erm framework details the step of assessing risk by understanding the likelihood and financial impact of risks this includes not only the direct risk e g a natural disaster yields an office unusable but also residual risks e g employees may not feel safe returning to the office though difficult the erm framework encourages companies to consider quantifying risks by assessing the percent change of occurrence as well as the dollar impact a company can respond to risk in the following four ways control activities are the actions taken by a company to create policies and procedures to ensure management carries out operations while mitigating risk control activities often referred to as internal controls are broken into two different types of processes information systems should be able to capture data useful to management to better understand a company s risk profile and risk management this means not granting exceptions for departments outperforming others all aspects of a company should be continually monitored by extension some of this data should be analyzed and communicated to employees if it is relevant to mitigating risk by communicating with employees there is more likely to be greater buy in for processes and protection over company assets a company can turn to an internal committee or an external auditor to review its policies and practices this may include reviewing what is actually performed compared with what policy documents suggest this may also entail getting feedback analyzing company data and informing management of unprotected risks in an ever changing environment companies must also be ready to assess their erm environment and pivot as needed the committee of sponsoring organizations coso board originally published the erm framework in 2004 then an updated version was published in 2017 the publication has been widely used since 2 |
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