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Equity Incentive? How Perceptions of Employee Stock Options Affect Job Performance 
 

4/20/2011  By Stephen Miller, CEBS 
 
 

Giving employees stock options arguably functions more as a lottery, with those employees who were lucky to sell their shares at the right time delivering better job performance while others do not, according to research by The Wharton School of the University of Pennsylvania.

Employees might not view stock options as an incentive at all, according to the 2011 study report, Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large U.S. Company.

The Wharton researchers found that granting stock options impacted employee performance only after workers earned a sizable payoff from exercising their stock options.

"The story is not that people work harder to make the share price go up," Wharton management professor Peter Cappelli, co-author of the report, told the Knowledge@Wharton website. "It is that if the share price goes up and people make money, they feel an obligation to work harder. That's a bit of a surprise."

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'It's not that people work harder to make the share price go up;
it's that if the share price goes up, people feel obligated
 to work harder.'

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'Reciprocity Effect'

"The reciprocity effect we found is really bigger than the incentive effect," Cappelli added. "We found that when the company does well and the share price goes up and people make more money, their performance in the next period goes up as well. The story reminds us that the workplace is a psychological place and a social place as well."

The researchers found that improved employee performance after a profitable exercise of stock options typically lasts for a year or longer. But the findings raise questions for the many firms that offer broad-based stock options as a benefit, since the price when employees sell their shares often depends on factors outside their control.

Given that the incentive value of stock options is so closely tied to share prices, "If I'm running a company, and I'm looking at this and we decide that we want to give everybody a stock option, I would start to question that a little," Cappelli concluded.

Other types of equity compensation include direct grants of stock shares, and grants of restricted shares that are either time-vested or which only can be sold when performance-based goals are met. Unlike stock options, restricted shares have an absolute value when granted  (see the HR Magazine article "Options to Stock Options").

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Study: Stock Options Improved Executive Performance, Had Minimal Effect on Rank and File Employees, SHRM Online Compensation Discipline, August 2010

Companies Enhancing Stock Plan Offerings to Employees at All Levels, SHRM Online Compensation Discipline, November 2009

Bringing Underwater Stock Options Back to the Surface, SHRM Online Compensation Discipline, February 2009 

Options to Stock Options, HR Magazine, April 2006

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