Summary
Until recently, stock options were primarily reserved for senior executives and selected managers in most American corporations. In the last decade or so, however, stock options have become part of the compensation package for an increasing number of rank-and-file employees. As of February 2000, the National Center for Employee Ownership (NCEO) estimated that there are more than 3000 active broad-based stock option (SO) plans in the United States based on an extensive review of press announcements by companies.
The expected benefits of broad-based- SO plans resemble those of other incentive compensation : reduced turnover and increased effort, creativity, and cooperation, which in turn, presumably result in higher productivity and ultimately better overall firm performance (Kroll, 1997) . In addition, stock options do not entail a direct charge against earnings, and they have the potential to foster an ‘ownership’ culture by focusing employee attention on the firm’s financial performance. Finally, they allow a lot of flexibility in tailoring rewards: SOs can be granted as a reward for joining the company; they can be based on individual performance and/or meeting group/business unit goals; or the grant can be tied to the profitability of the company, etc.
Empirical evidence for the positive effects of stock options on productivity and market valuation is beginning to accumulate (Weeden, Carberry & Rodrick, 1998; Sesil, Kroumova, Kruse & Blasi, 2000; Blasi, Kruse, Sesil & Kroumova, 2000). The expected benefits of SO plans make them attractive to both unionized and non-unionized employers who are trying to design an efficient compensation package. As unions tried to reinvent themselves as a valuable partner for both employers and employees in the 1990s, they have become more open to incentive pay, including stock options. However, as of yet, there is little conceptual and empirical work on how broad-based stock option plans work, and what, if any, effect they have on company performance in union firms . An empirical comparison of the relationship between SO plans and firm performance in union and non-union firms may therefore be informative for future theory building. The goal of this paper is to assess the differences in economic and financial performance between stock option and non-stock option companies in unionized and non-unionized settings.