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Incentivising Employees
Employee share ownership has the potential to generate a culture of enterprise and innovation, and build national wealth and savings. This book is the culmination of a multi-year research project funded by the Australian Research Council and represents the first detailed discussion of the theory, policy and practice of employee share ownership plans (ESOPs) in Australia. The topics examined in the book are key legal and policy issues relevant to ESOPs, the current incidence and forms of ESOPs in Australia, the corporate law and taxation law frameworks, why employers implement ESOPs and why employees participate in them, international comparisons, and recommendations for reform.
eBook
Broad-Based Employee Stock Ownership: Motives and Outcomes
Firms initiating broad-based employee share ownership plans often claim employee stock ownership plans (ESOPs) increase productivity by improving employee incentives. Do they? Small ESOPs comprising less than 5% of shares, granted by firms with moderate employee size, increase the economic pie, benefiting both employees and shareholders. The effects are weaker when there are too many employees to mitigate free-riding. Although some large ESOPs increase productivity and employee compensation, the average impacts are small because they are often implemented for nonincentive purposes such as conserving cash by substituting wages with employee shares or forming a worker-management alliance to thwart takeover bids.
Journal Article
Performance Feedback and Firm Risk Taking: The Moderating Effects of CEO and Outside Director Stock Options
We contribute to the behavioral theory of the firm and the behavioral agency model by developing a theoretical framework that predicts the differential interaction effects of performance feedback and values of stock option grants of multiple agents on firm risk taking. We explain how chief executive officers (CEOs) versus outside directors awarded with stock option grants perceive negative or positive deviations from prior performance. We argue that in a negative attainment discrepancy context, high values of option grants will increase the risk aversion of CEOs who already bear excessive employment and compensation risks, resulting in less risk taking; however, it will enhance the risk-taking propensity of influential outside directors who increase monitoring and support for risky projects because their risk preferences are better aligned with those of shareholders. In a positive attainment discrepancy context, high values of option grants will amplify risk aversion in both CEOs and outside directors who perceive risky strategies as potential threats to anticipated incentive values associated with a gain domain, thereby reducing risk-taking activities. Analysis of panel data from 1992 to 2006 on the research and development spending of U.S. manufacturing firms based on Arellano–Bond dynamic panel regression reveals findings largely consistent with our predictions.
Journal Article
Understanding the Indian Startup Ecosystema Holistic Exploration of Dynamics, Profitability, and Employee Perspectives
India has established itself as the third-largest global startup ecosystem, with thriving start-ups. Despite commanding high valuations, startups across diverse sectors are grappling with challenges in achieving profitability. Increasing concerns about job security and the potential for additional layoffs in the absence of an improved funding environment are causing apprehension among talent, even within larger startups. The research intends to analyse the Indian startup ecosystem, analyse and compare the profitability of chosen Unicorns and Decacorns in both listed and unlisted categories, and understand the employee perception of working in startups. An analytical research design is followed. To understand employee perception, a survey facilitated through a structured questionnaire has been conducted among 100 employees of startups situated in Karnataka and Kerala, regions distinguished for their highly supportive ecosystems. Analysis depicted a discrepancy in profitability suggesting that Decacorns, with their startup status, robust valuations, and soaring operating revenue, have yet to establish themselves as consistently profitable entities. Findings from the employee survey highlight that learning opportunities and accelerated career growth stand out as motivating factors for choosing employment in startups. Conversely, the downsides include concerns about change, job insecurity, and workload. The comprehension of stock options at the knowledge level was evident, potentially serving as a stirring factor for startups to incorporate into their employee benefits.
Journal Article
The Effect of Financial Reporting Quality on Corporate Investment Efficiency: Evidence from the Adoption of SFAS No. 123R
We test for changes in investment efficiency around a shock to financial reporting quality—the adoption of SFAS No. 123R, which requires that employee stock option (ESO) costs be recognized rather than disclosed at fair value. We predict and find a reduction in underinvestment for firms heavily affected by the new standard, and these firms exhibit a decrease in the bid–ask spread and an increase in new capital raised in the post-SFAS No. 123R period. The reduction in underinvestment is more pronounced for firms whose ESO estimates are more unreliable before SFAS No. 123R, for firms that are financially constrained, and for firms with more entrenched managers. These findings are consistent with recognition of ESO costs at fair value improving financial reporting quality, which, in turn, enhances investment efficiency through the mitigation of the adverse selection problem for underinvesting firms.
The online appendix is available at
https://doi.org/10.1287/mnsc.2018.3045
.
This paper was accepted by Suraj Srinivasan, accounting.
Journal Article
Uncertainty avoidance and the timing of employee stock option exercise
We examine the impact of the cultural norm of uncertainty avoidance on employee stock option (ESO) exercise behavior using proprietary data from a multinational firm. We find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier. These findings lend support to a maintained assumption in the ESO literature that employee attitudes toward uncertainty influence stock option exercise behaviors. Our findings further help to explain prior findings of cross-cultural differences in firms’ compensation practices by indicating that employee responses to optionbased pay and firms’ consequent financial reporting costs vary as functions of employee uncertainty avoidance.
Journal Article
Impact of Asset Bubbles on Exercise of Executive Stock Options
This study examines whether Chief Executive Officers (CEOs) exercise a greater proportion of their exercisable options in response to firm-specific stock price bubbles. For a sample of U.S. firms from 1992 to 2021, the study identifies stock price bubble periods using the Generalized Sup Augmented Dickey-Fuller (GSADF) method. A bubble is a statistical measure that detects an ex-post firm-specific stock price exuberance that creates abnormally high variation in stock prices arising from changes in discount rates, R&D and market liquidity. If executives have private information and can infer firm-specific bubbles, they are likely to exercise a greater proportion of their exercisable stock options during bubbles to benefit from their firms’ stock price exuberance. Using data aggregated at the CEO-year level, we find that executives are prone to exercising a larger portion of their vested stock options during market bubbles, with the aim of monetizing on the exuberance in the firm’s stock price. They leverage their expertise and their acquired price-sensitive private information to identify these bubbles. We also find that CEOs’ option exercise activity increases as the duration of the bubble increases to capture the price momentum.
Journal Article
Optimal contracting under mean-volatility joint ambiguity uncertainties
We examine a continuous-time principal-agent problem under mean-volatility joint ambiguity uncertainties. Both the principal and the agent exhibit Gilboa–Schmeidler’s extreme ambiguity aversion with exponential utilities. We distinguish between expost realized and exante perceived volatilities, and argue that the second-best contract necessarily consists of two sharing rules: one for realized outcome and the other for realized volatility. The outcome-sharing rule is for uncertainty sharing and work incentives, as usual, and the volatility-sharing rule is to align the agent’s worst prior with that of the principal. At optimum, their worst priors are symmetrized, and realized compensation is positively related to realized volatility. This theoretical positive relation can be consistent with popular managerial compensation practices such as restricted stock plus stock option grants. A closed-form solution to a linear-quadratic example is provided.
Journal Article