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Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories

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Listed:
  • Oyer, Paul

    (Stanford U)

  • Schaefer, Scott

    (Northwestern U)

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 grant 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.

Suggested Citation

  • Oyer, Paul & Schaefer, Scott, 2004. "Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories," Research Papers 1772r, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:1772r
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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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