Broad-based Stock Option Plans Research Articles

Broad-Based Financial Participation Plans and Their Impact on Financial Performance: Evidence from a Dutch Longitudinal Panel

This study investigates the relationship between broad-based financial participation plans (which target all employees) and financial performance, using a panel dataset of listed, companies (excluding financial institutions) during the period 1992–2009, comprising 2,153 observations. We make a distinction between broad-based profit sharing, share and stock option plans. The panel data allow us to take into account time-lag effects, as profit sharing is usually said to have short-term effects, while share plans and stock options and are intended to have longer term impact. Our results show that broad-based profit sharing and share plans and combinations of these plans are positively related with financial performance when compared with companies without such plans. However, the results are inconsistent for the associations between broad-based stock option plans and financial performance in the longer term. These findings extend the literature on financial participation plans by including different forms of broad-based financial participation and showing that the different forms affect companies’ financial performance differently. Our results also support earlier reports in the literature, which suggest that there are important synergies between broad-based profit-sharing and share plans, in terms of a better combination of intrinsic ownership behaviors and extrinsic motivation of employees as well as a stronger focus on collective interest and performance when compared with single plans.

Neighborhood matters: The impact of location on broad based stock option plans

We find that fixed effects related to the location of firms’ headquarters explain variation in broad based option grants after controlling for industry effects and firm characteristics traditionally known to affect option granting. Location matters because of local labor market conditions and social interaction with neighboring firms. Broad based option grants are higher: (i) when a firm's stock prices co-move more with stock prices of other firms located in that Metropolitan Statistical Area (MSA); (ii) in states that are less likely to enforce non-compete agreements; and (iii) in MSAs where employees prefer options because stocks there experience abnormally high returns.

Neighborhood Matters: The Impact of Location on Broad Based Stock Option Plans

We find that fixed effects related to the location of a firm's headquarters explain variation in broad based option grants after controlling for industry effects and firm characteristics traditionally known to affect option granting. Location matters because of local labor market conditions and social interaction with neighboring firms. Broad based option grants are higher (i) when the firm's stock prices co-move more with stock prices of other firms located in that Metropolitan Statistical Area (MSA); (ii) in states that are less likely to enforce non-compete agreements; and (iii) in MSAs where employees prefer options because firms there have enjoyed abnormally high stock returns. Social influence affects broad based option grants because firms grant more options to rank and file workers when other firms in the MSA grant more broad based options. The neighborhood's option granting practices matter most when the firm is located in a region with a highly educated work force. All results with the exception of the impact of non-compete agreements hold when firms located in California are excluded. However, these results do not hold for top executive option grants.

Costs of broad-based stock option plans

We generate estimates of the costs of broad-based stock option programs under varying assumptions about why firms use these pay schemes. We show that, if accounting considerations alone drive option grants, a typical firm in our sample incurs between 50 cents and one dollar of real costs in order to increase reported pre-tax net income by one dollar. This cost is reduced, but is still quite substantial, if accounting leads firms to grant options rather than restricted stock. We also show that, if option grants are efficient, the patterns in our data are consistent with firms using these grants to attract and retain employees.

Why do some firms give stock options to all employees?: An empirical examination of alternative theories

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and employee retention. We gather data from three sources on firms’ stock option grants to middle managers. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. We also conduct a cross-sectional regression analysis of firms’ option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms' stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

Intellectual Capital, Monitoring and Risk: What Predicts the Adoption of Broad-based Employee Stock Options?

In this paper, we use empirical analysis to analyze company characteristics associated with the adoption and maintenance of broad-based stock option plans. First, a cross-sectional analysis evaluates what company characteristics are now associated with these plans. Second, a longitudinal analysis examines the company characteristics that predict the adoption of such plans. Overall, our results provide support to the claim that higher monitoring costs prompt firms to adopt and maintain employee stock option plans. Firms with higher levels of business risk are less likely to shift some of that risk to employees through stock-based compensation, whereas firm with higher variability in total shareholder returns are more likely to adopt broad-based employee stock options. Nonunion firms are more likely to adopt and maintain such plans, and financial constraints do not appear to be driving the adoption decision.

Designing and Implementing a Broad-Based Stock Option Plan

Companies are increasingly interested in implementing broad-based stock option plans. By giving stock options to nonexecutives, companies make good the promise of letting employees share in the company's success. However, in the variety store of broad-based option plans, one size does not fit all. It is therefore important to balance the benefits of implementing a broad-based stock option plan against its economic and other costs. Good results in implementing broad-based stock options require extensive education and consistent communication to employees, a review process to modify the plan to reflect changes in business needs, and an increase in the stock price so that the plan generates value for participants. But, even a good plan design, one that achieves important business objectives at a reasonable cost, can still fail due to inadequate effort, market risks, and maintenance difficulty.

How to Use Technology to Effectively Deliver Broad-Based Stock Option Plans

Companies turning to broad-based stock option plans should consider using new technologies to support these plans in terms of both administration and communication. Indeed, as the number of employees who are eligible for these types of plans continues to explode, the administrative burden for typical HR departments, which in the past served these plans with simple spreadsheet programs, will become overwhelming without the help of technology. Furthermore, intranet, interactive voice response, and other technological solutions would make communicating information to employees easier. The right technology partner will also contribute new skills and expertise in the move to broader-based stock option plans.