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Title:Employee stock options PDF Logo
Authors:Børsum, Øystein
Issue Date:2010
Series/Report no.:Memorandum // Department of Economics, University of Oslo 2010,11
Abstract: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.
Subjects:Financing
asymmetric information
signaling
employees
compensation
stock options
JEL:D82
G32
J33
M52
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

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