On the Use of Option Grants as a Retention Tool

Firms regularly grant stock and stock options to their employees as a way to align the incentives of employees and shareholders. This is particularly relevant for executives, because they routinely make decisions that have an appreciable effect on firm value and their incentives often clash with those of shareholders. It is unclear, however, whether the alignment motivation is relevant for rank-and-file (R&F) employees, because their individual behavior in the workplace has a trivial effect on firm value.

An alternative motivation for awarding stock options is to reduce employee turnover. All firms incur costs from recruiting and training replacement employees, including … Read more