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 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 that the relation between employees’ perceptions of management’s credibility and voluntary turnover intentions is significantly stronger in the presence of a broad-based equity plan. Our findings provide insight into how broad-based equity pay can improve firm performance despite theoretical challenges regarding its incentive effects. This paper was accepted by Suraj Srinivasan, accounting. Funding: M. Vance acknowledges financial support from fellowships received through the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4524 .