Why do some firms give stock options to all employees?: An empirical examination of alternative theories

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.

Is adoption of restricted stock grants related with firm performance?

“…This study's empirical results are not consistent with those of many foreign studies, including Bryan et al (2000), Lambert and Larcker (2004), Oyer and Schaefer (2005), Brown and Lee (2007), Carter et al (2007), Lambert (2007), Aboody and Kasznik (2008), and Irving et al (2011). However, the results are consistent with the findings of Hall and Murphy (2002) and Blouin and Carter (2010).…”

“…Aboody and Kasznik (2008) also assert that because restricted stock grants allow employees to obtain the dividend distribution right before meeting the requirements, managers will raise the dividend rates due to selfish motives. Furthermore, regarding the employee retention effect of share-based compensation schemes, Oyer and Schaefer (2005) believe that the employee retention effect of employee stock options on key personnel is better than that of restricted stock grants because more efforts will be made to improve the company's future performance if key personnel can increase the difference between the option price and the disposal price in order to substantially increase the value of the share-based compensation scheme. Finally, Bergman and Jenter (2007) proposed that in a more intense competitive labor market, the capital gains created by employee stock options are even more important to the retention of key personnel.…”

“…Furthermore, Oyer and Schaefer (2005) and Desai et al (2010) mentioned that after the implementation of a share-based compensation scheme, the improvement of a company's future performance depends on whether the following two conditions can be simultaneously met: (1) whether the scheme can attract key talents; and (2) whether the key talents are willing to stay and make efforts to improve the company's future performance. Therefore, this study suggests that when a company's compensation scheme has a higher incentive effect than that of other companies, the company's future performance will be better.…”

CEO Compensation in Canada, 1971-2008

“…This coincides with the pinnacle of the dotcom bubble where many companies from the so-called "new economy" started to provide long-term incentives to a broad population of employees, essentially through stock option plans (Oyer & Schaefer, 2005;Sesil et al, 2002). This has certainly forced boards of companies from the "old economy" to consider long-term incentives more consistently for competitive purposes, hence the rigorous apparition of long-term incentive data in the survey and the soaring number of compensation statistics.…”

Evaluating the effects of equity incentives using PSM: Evidence from China

“…First, option plans are more attractive to reputation management (Oyer and Schaefer, 2005). With option rewards, management has more incentive to improve firm performance in the long run.…”