Working Paper: NBER ID: w10222
Authors: Paul Oyer; Scott Schaefer
Abstract: Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms' stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms' option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.
Keywords: stock options; employee compensation; incentives; sorting; retention
JEL Codes: J31; J33; L23; M40; M50; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock options (G13) | employee motivation (M52) |
| stock options (G13) | agency problems (G34) |
| stock options (G13) | optimistic employees (M54) |
| optimistic employees (M54) | reduced overall compensation costs (J32) |
| stock options (G13) | employee retention (M51) |
| employee retention (M51) | costs associated with leaving the firm (J32) |
| stock prices and labor market conditions (J29) | stock options (G13) |
| volatile stock returns (G17) | broad-based stock option plans (M52) |