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Stock-based Compensation Plans and Employee Incentives

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  • Zabojnik, Jan

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 effcient than a contract based solely on individual performance.

Suggested Citation

  • Zabojnik, Jan, 2014. "Stock-based Compensation Plans and Employee Incentives," Queen's Economics Department Working Papers 274650, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274650
    DOI: 10.22004/ag.econ.274650
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    Keywords

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    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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