Selection Benefits of Stock-Based Compensation for the Rank-and-File

34 Pages Posted: 17 Aug 2012 Last revised: 25 Oct 2015

See all articles by Jeffrey Hales

Jeffrey Hales

University of Texas at Austin - Department of Accounting

Laura W. Wang

University of Illinois at Urbana-Champaign

Michael G. Williamson

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: June 1, 2013

Abstract

We investigate a potential selection benefit of stock-based compensation for rank-and-file employees, whose pay under this compensation form is insensitive to their individual efforts. Using a laboratory experiment, where we control for both the timing and expected magnitude of compensation, we demonstrate that individuals with higher levels of dispositional optimism are more likely to choose compensation contingent on a company’s future stock price over a fixed salary, even after controlling for the individual’s risk tolerance. Furthermore, individuals who select stock-based compensation also perform better when confronted with a challenging problem-solving task, as compared to those selecting a fixed salary. As expected, dispositional optimism mediates this performance effect, consistent with theory suggesting that optimists believe more strongly that their efforts will generate high productivity motivating them to work harder on a task. In addition to contributing to a better understanding of the puzzling prevalence of stock-based compensation plans at the rank-and-file level, our results also offer testable empirical implications.

Keywords: stock-based compensation, contract self-selection, employee optimism

Suggested Citation

Hales, Jeffrey and Wang, Laura W. and Williamson, Michael G., Selection Benefits of Stock-Based Compensation for the Rank-and-File (June 1, 2013). AAA 2013 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2131337 or http://dx.doi.org/10.2139/ssrn.2131337

Jeffrey Hales

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-2163 (Phone)
512-471-3907 (Fax)

Laura W. Wang (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States
4696844455 (Phone)

Michael G. Williamson

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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