Selection benefits of stock-based compensation for the rank-and-file

Research output: Contribution to journalArticle

Abstract

We investigate a potential selection benefit of stock-based compensation for rank-and-file employees, whose pay under this compensation form is insensitive to their individual efforts. We use a laboratory experiment to demonstrate that individuals with higher levels of dispositional optimism are more likely to choose compensation that is contingent on a company's future stock price than to choose fixed pay, even after controlling for the individual's risk preferences. Furthermore, compared to participants selecting fixed pay, those selecting stock-based compensation also perform better on a challenging problem-solving task, a result that we show is due to their higher levels of dispositional optimism. Collectively, we demonstrate that stock-based compensation can have productivity-enhancing effects, even if stock prices are completely insensitive to individual efforts. In doing so, we provide a partial explanation for the puzzling prevalence of stock-based compensation plans at the rank-and-file level and contribute to the broader contract-selection literature.

Original languageEnglish (US)
Pages (from-to)1497-1516
Number of pages20
JournalAccounting Review
Volume90
Issue number4
DOIs
StatePublished - Jul 2015

Keywords

  • Contract self-selection
  • Employee optimism
  • Stock-based compensation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Selection benefits of stock-based compensation for the rank-and-file'. Together they form a unique fingerprint.

  • Cite this