Abstract
This paper considers the role of stock-based compensation, such as restricted stock grants and stock options, in mitigating the moral hazard problem in teams in which agents who face the possibility of turnover must choose a level of effort or investment within working relationships with the other agents. We formally derive results in which stock-based compensation is a component of an optimal compensation contract, and in particular, in which stock-based compensation is superior to cash-based compensation such as bonuses and severance payments. We also show that stock-based compensation is not optimal in individual production. The results also provide new empirical and practical implications for stock-based compensation from the viewpoint of team incentives and job turnover.
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