Get access to the exclusive HR Resources you need to succeed in 2018.
Sign up for free email newsletters and get more SHRM content delivered to your inbox.
Is your employee handbook keeping up with the changing world of work? With SHRM's Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Build competencies, establish credibility and advance your career—while earning PDCs—at SHRM Seminars in 14 cities across the U.S. this fall.
Gain the skills you need to rise to the next level in your career. Jon us at SHRM's Leadership Development Forum, October 2-3 in Boston.
Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.
Stock options have rewarded many thousands of employees, particularly those working in the information technology industry, with income that far outstrips their normal salaries. It has become an article of faith in Silicon Valley that those rewards create incentives for employees to work harder and smarter, in turn rewarding the companies that lavish options on the workforce with better performance and greater shareholder value.
But does that assumption stand up to careful scrutiny?
The answer: It depends on who is receiving the options, according to a new study co-authored by
Nicole Bastian Johnson, an assistant accounting professor at the University of California, Berkeley’s Haas School of Business.
“Our findings provide evidence that options provide incentive effects at the executive level that are sufficiently large to be reflected in firm performance, but no evidence for similar incentive effects for non-executive employees,” wrote Johnson and co-authors professor David Aboody of UCLA’s Anderson School of Management and associate professor Ron Kasznik of Stanford University’s Graduate School of Business.
Their paper, “Employee Stock Options and Future Firm Performance: Evidence from Option Repricings,” was published in the May 2010 issue of the
Journal of Accounting and Economics. Most notable is the finding that granting options to a broad selection of employees may not be an effective tool, Johnson says.
----------------------------------------------------------------Options provided incentive effects at theexecutive level sufficiently large to bereflected in firm performance.---------------------------------------------------------------
Measuring the Incentive Effect
Options and their effect on corporate performance have been frequently studied. However, nearly all of the research has focused on options for executive-level employees. Few researchers have looked at companies that granted options to rank-and-file employees, largely because obtaining data is so difficult, Johnson says.
Public companies generally disclose option grants on regularly scheduled proxy statements, but usually for only top-level managers. Digging through hundreds of corporate filings with the U.S. Securities and Exchange Commission to find who else may have received options is extremely time-consuming. But that’s what Johnson and her colleagues did.
The researchers identified 1,364 companies with employee stock options whose stock price declined by 30 percent or more annually in any of the years between 1990 and 1996. Of those companies, 300 repriced and formed a basis of comparison to a control group of the 1,064 that didn’t.
The researchers theorized that when a company’s stock price falls below the exercise price of an option, much of any incentive effect the options may have had disappears. Repricing those options should restore those incentives, the researchers assumed. A situation in which options have been repriced should be similar to that of a newly instituted option-grant program.
The researchers first asked whether companies that repriced outperformed the companies that didn’t, as measured by cash flow and operating income over one, three and five years. Companies that repriced options did significantly outperform the control group, and the performance gap grew over time.
Johnson and her colleagues also found that companies that had repriced options for only executive-level employees significantly outperformed the companies that had not repriced at all. But firms that repriced options for only non-executive employees did not outperform the control group.
A Few Caveats
While Johnson is confident that the study’s results are meaningful, there are, she says, caveats.
For example, the researchers chose to study performance before significant accounting changes were made to the treatment of options, particularly the rule instituted in 2005 requiring companies to expense the cost of options. However, while that rule may have prompted some firms to cut back on granting stock options, the researchers do not have any reason to assume it would have changed the effect that option grants have on employee behavior—the focus of their study.
Stephen Miller is an online editor/manager for SHRM.
New Rules Govern Employee
Stock Purchase Plans and Incentive
SHRM Online Compensation Discipline, February 2010
Employee Equity Plans Likely to Survive Slow Economy,
SHRM Online Compensation Discipline, November 2009
Companies Enhancing Stock Plan Offerings to Employees at All Levels,
SHRM Online Compensation Discipline, November 2009
SHRM Online Compensation Discipline
Salary Survey Directory
Compensation Data Center
• Sign up for SHRM’s free
Compensation & Benefits e-newsletter
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Please sign in as a SHRM member before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
SHRM Annual Conference & Exposition
SHRM’s HR Vendor Directory contains over 10,000 companies