The effect of stock option grants on voluntary employee turnover

Abstract

PurposeThe objective of this research is to examine the effect of a broad‐based option program on voluntary employee turnover.Design/methodology/approachThe paper examines the effect of a broad‐based stock option program in a Fortune 100 company during the 1990s and uses logistical analysis.FindingsEmployee turnover is an issue due to the costs involved in recruiting and training replacements. Voluntary turnover can be reduced if a cost can be imposed on the departing employee. This cost need not be an explicit cost, but can take the form of a benefit forgone when the employee departs. Along these lines, stock option grants to employees, if properly structured, have the ability to reduce voluntary employee turnover. The paper finds that voluntary turnover is lower during the periods in which the option cannot be exercised, i.e. the vesting period. This effect is strongest for employees approaching retirement, but also holds for employees leaving the company for other reasons.Originality/valueThe finding that unvested options reduce or delay voluntary turnover, which while intuitive, has not to the author's knowledge been shown previously, and is important for those involved in the compensation plan design process.