Sorting Effects of Broad-Based Equity Compensation

Abstract

We examine the sorting role of broad-based equity pay using detailed employee-level data. We propose trust in management as an important and beneficial characteristic over which equity pay sorts employees, as such pay typically leaves employees with concentrated positions in employer stock and therefore more exposed to the outcomes of management’s actions. Consistent with this conjecture, we find a negative relation between equity pay and retention among employees who are less trusting of management, but no relation among more trusting employees. Our findings provide insight into how broad-based equity pay can improve firm performance despite theoretical challenges regarding its incentive effects.