DOL Public Hearing

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Consistent with economic theory, we find that the incentive-performance effect is observed only in smaller firms, and in firms with higher growth options per employee. Finally, we find that that this incentive-performance effect is concentrated solely in firms that grant options broadly to non-executive employees, supporting the argument that options may induce cooperation or monitoring among co-workers, in addition to other known effects such as sorting and retention of employees.

To the best of our knowledge, these findings represent the first evidence of a net benefit from the implied incentives of employee stock options on firm performance, and as a result, our study has broad implications for workforce compensation overall. Importantly, we show that free-riding is not the overriding force that some theoretical treatments of this topic suggest. Rather, our findings suggest that while free-riding may be present to some extent, mutual monitoring by co-workers may be the stronger force.