Does Employee Compensation Still Impact Payout Policy?

69 Pages Posted: 4 Jun 2018 Last revised: 1 Jul 2019

See all articles by Alice A. Bonaime

Alice A. Bonaime

University of Arizona

Kathleen M. Kahle

University of Arizona - Department of Finance

David Moore

Loyola Marymount University

Alok Nemani

Bentley University

Date Written: June 13, 2019


Employee compensation may impact payout policy (i) by incentivizing managers with non-dividend-protected options to favor repurchases over dividends and (ii) by diluting earnings, which firms can neutralize through share repurchases. Both the dividend-protection and dilution channels imply a positive relation between stock options and repurchases, but recent studies and trends suggest no decline in repurchases when option grants fall around mandatory option expensing, casting doubt upon a causal relation between equity compensation and payout. We examine this relation in light of the shift from options to restricted stock. Our results strongly support a positive relation between compensation and share repurchases through the dilution channel; dividend protection no longer has first-order effects on payout. Difference-in-differences analyses using a shock to compensation around mandatory option expensing and an instrumental variable approach suggest that the relation between dilution and payout is likely causal. Further, as the dilution channel predicts, equity compensation positively relates to repurchase frequency and thus repurchase timing.

Keywords: Share Repurchases, Dividends, Payout Policy, Stock Options, Restricted Stock, Employee Compensation, Earnings Dilution

JEL Classification: G30, G32, G35

Suggested Citation

Bonaime, Alice A. and Kahle, Kathleen M. and Moore, David and Nemani, Alok, Does Employee Compensation Still Impact Payout Policy? (June 13, 2019). Available at SSRN: or

Alice A. Bonaime (Contact Author)

University of Arizona ( email )

Eller College of Management
Department of Finance
Tucson, AZ 85721
United States

Kathleen M. Kahle

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

David Moore

Loyola Marymount University ( email )

Los Angeles, CA 90045
United States

Alok Nemani

Bentley University ( email )

175 Forest ST
Apartment 216
Waltham, MA 02452
United States

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