Stock Options and Incentives: Employee-Level Evidence from Google

Abstract

We examine whether stock option and restricted stock grants motivate higher performance using employee-level data from Google. Employees who received more equity grants than peers hired at the same time and job grade perform slightly better in the future across a variety of measures. To attempt to determine the direction of causality in this relationship, we exploit the fact that employees' option strike prices, and thus their exposure to Google stock, depend on Google's stock price the week they start work. Employees who start work when the stock price is lower than surrounding weeks, and who thus receive more equity exposure from their options, do not perform significantly better than their peers. Even if the correlation between equity grants and performance is interpreted causally, the incentive effects of stock options are still small relative to those from being eligible for promotion. On the other hand, we do find evidence that unvested equity encourages retention and that employees may jointly make retention and performance decisions.