Employee stock options

Arbeitspapier

An entrepreneur with information about firm quality seeks financing from an uninformed investor in order to pay a worker. I show that if the worker, too, knows the true quality of the firm, then certain long term wage agreements can credibly signal firm quality. Such wage agreements have a low initial wage and are equity-like in the sense that future pay is tied to firm performance, because only a worker in a good quality firm would be willing to defer compensation to an uncertain future, getting paid only if the firm succeeds. Moreover, in an important pooling equilibrium, all firms use equity-like wage contracts. The model provides an economic rationale for the use of stock options among regular, non-executive employees, in particular in small, knowledge-intensive firms (such as in the 'new economy') where workers are more likely to have information about the true quality An entrepreneur with information about firm quality seeks financing from an uninformed investor in order to pay a worker. I show that if the worker, too, knows the true quality of the firm, then certain long term wage agreements can credibly signal firm quality. Such wage agreements have a low initial wage and are equity-like in the sense that future pay is tied to firm performance, because only a worker in a good quality firm would be willing to defer compensation to an uncertain future, getting paid only if the firm succeeds. Moreover, in an important pooling equilibrium, all firms use equity-like wage contracts. The model provides an economic rationale for the use of stock options among regular, non-executive employees, in particular in small, knowledge-intensive firms (such as in the 'new economy') where workers are more likely to have information about the true quality of the firm.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Memorandum ; No. 2010,11

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Compensation Packages; Payment Methods ; Personnel Economics: Compensation and Compensation Methods and Their Effects
• Subject: Financing ; asymmetric information ; signaling ; employees ; compensation ; stock options ; Aktienoption ; Vergütungssystem ; Unternehmensfinanzierung ; Asymmetrische Information ; Signalling ; Theorie

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Børsum, Øystein
• Event: Veröffentlichung
• (who): University of Oslo, Department of Economics
• (where): Oslo
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/47314
• Last update: 10.03.2025, 11:45 AM CET