A Review of Employee Stock Option Plans: Panacea or Pandora’s Box for Firm Performance

Abstract

Employee stock option Plans (ESOPs) have gathered enormous attention in recent decades and have become the most controversial component of the compensation package. Organizations around the globe have been using ESOPs to compensate their employees at managerial and non-managerial levels. While traditionally the stock options were reserved for top management employees, lately there has been strong growth of broad-based plans primarily to increase firm value. Recent literature examining the effects of broad-based stock options are not limited to executive but available for all employees (Core and Guay, 2001; Oyer and Schaefer, 2005; Hallock and Olson, 2010, etc.). However, the shareholders have become increasingly apprehensive about the size and proliferation of adoption of stock option plans. Accordingly, they have been an issue of debate in both academic research and practice circles. The present paper outlines the theoretical foundations behind the use of ESOPs in the compensation mix and strives to address the controversy of whether or not stock options adoptions result in enhancement in firm value. Though the evidence is mixed on the implications of ESOPs, however, there exists robust support for a positive interrelationship between the adoption of these plans and firm performance for large sized firms.