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Stock-based Compensation Plans And Employee Incentives

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  • Jan Zabojnik

Abstract

Standard principal-agent theory predicts that large firms should not use employee stock options and other stock-based compensation to provide incentives to non-executive employees. Yet, business practitioners appear to believe that stock-based compensation improves incentives, and mounting empirical evidence points to the same conclusion. This paper provides an explanation for why stock-based incentives can be effective. In the model of this paper, employee stock options complement individual measures of performance in inducing employees to invest in firm-specific knowledge. In some situations, a contract that only consists of options is more efficient than a contract based solely on individual performance.

Suggested Citation

  • Jan Zabojnik, 2014. "Stock-based Compensation Plans And Employee Incentives," Working Paper 1325, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1325
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1325.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Stock-based Compensation; Employee Stock Options; Optimal Incentive Contracts; Firm-specific Knowledge;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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