Broad-Based Equity Compensation, Employee Turnover, and Unit Performance - CLEO Skip to main content


This study, which consists of two essays, examines the performance effects of a deferred equity plan on both individual employee and business unit outcomes. The first essay investigates the effects of deferred compensation plan characteristics on voluntary turnover decisions, using detailed data on store-level employees of a large retail firm. Overall, I find that employees who are eligible to receive deferred profit sharing payments have significantly lower voluntary turnover. However, the relation between eligibility and turnover varies depending upon the specific plan eligibility requirement (i.e., age, tenure, hours worked per year), with stronger retention effects when plan contributions are larger. Vesting restrictions are associated with lower turnover rates, but only among non-managerial store employees. Finally, the retention benefits from unvested plan holdings are driven primarily by deferred compensation that is invested in the company’s stock rather than in diversified mutual funds. These findings suggest that employees may respond to the retention incentives provided by a deferred compensation plan, but that specific plan characteristics play a key role in determining the plan’s retention benefits. The second essay examines the effects of equity compensation on unit performance at the same retail firm. Prior studies have argued that providing non-managerial employees “a piece of the pie” through equity compensation is a means to improve firm performance, while critics contend that the free-rider problem will negate the performance effects of broad-based employee ownership. I find that equity compensation is positively associated with unit profitability. While I find that reduced employee turnover mediates the relationship between equity compensation and performance, the evidence suggests that effort incentives are the primary source of performance effects.