Stock-based Compensation Plans And Employee Incentives

Jan Zabojnik

No 1325, Working Paper from Economics Department, Queen's University

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.

Keywords: Stock-based Compensation; Employee Stock Options; Optimal Incentive Contracts; Firm-specific Knowledge (search for similar items in EconPapers)
JEL-codes: D86 J33 M52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-06
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1325

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