Why Do Some Firms Give Stock Options to All Employees?: An Empirical Examination of Alternative Theories

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms' stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms' option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

Compensating Employees Below the Executive Ranks: A Comparison of Options, Restricted Stock, and Cash

Using a detailed data set of employee stock option grants, we compare observed stock-option-based pay plans to hypothetical cash-only or restricted-stock-based plans. We make a variety of assumptions regarding the possible benefits of options relative to cash or stock, and then use observed option grants to make inferences regarding firms' decisions to issue options to lower-level employees. If the favorable accounting treatment is the sole reason underlying firms' choices of options over cash-only compensation, then we estimate that the median firm in our data set incurs $0.64 in real costs in order to increase reported pre-tax income by$1. This figure is several times larger than the willingness-to-pay for earnings reported by Erickson, Hanlon, and Maydew (2002), who study firms that (allegedly) commit fraud in order to boost earnings. If, on the other hand, firms' option-granting decisions are driven by economic-profit maximization then observed stock option grants are most consistent with explanations involving attraction and retention of employees.

CEO pay and the Lake Wobegon effect

Working PaperIn this paper, we propose a new explanation for the recent increase in CEO pay at US firms. Our explanation, which is based on asymmetric information in financial markets, is motivated by a recent observation made by former DuPont CEO Edward S. Woolard, Jr.: "The main reason (CEO) compensation increases every year is that most boards want their CEO to be in the top half of the CEO peer group, because they think it makes the company look strong. So when Tom, Dick, and Harry receive compensation increases in 2002, I get one too, even if I had a bad year.... (This leads to an) upward spiral" (Elson, 2003). We present a game-theoretic model of this phenomenon, which is known in the business press as the "Lake Wobegon Effect." Our model has three key features: (i) there is asymmetric information regarding the manager's ability to create value at the firm; (ii) the pay package given to the manager must convey information about the manager's ability to create value at the firm; and, (iii) the firm must have some preference for favorably affecting outsiders' perceptions of firm value. We characterize the perfect Bayesian equilibrium of this model, identify conditions under which pay is distorted upward relative to a full-information benchmark, and then embed our model in a simple assortative matching framework. Our analysis offers a potential explanation across-country differences in CEO pay growth, and suggests that greater shareholder involvement in the pay process may be counterproductive

Retooling the ethanol industry : thermophilic, anaerobic digestion of thin stillage for methane production and pollution prevention

Anaerobic digestion of thin stillage from a corn ethanol plant was tested at thermophilic temperature with a completely stirred tank reactor. Loading at 30, 20, 15, and 12 day hydraulic retention times (HRT) was tested. Ultrasonic pretreatment was used for one digester with another as a control. The influent thin stillage was a concentrated waste stream with 100 g/L total chemical oxygen demand and 60 g/L volatile solids (VS) typical. Significant reduction of VS was achieved with a maximum reduction (89.8%) at the 20 day HRT. Methane yield was also high with a typical yield of 0.6-0.7 L-CH₄/g-VS[subscript removed] during steady state operation. Effluent VFAs were low for a thermophilic anaerobic digester with less than 200 mg/L as acetic acid for the 20 and 30 day HRTs. The influent thin stillage had a low pH (~4) and zero alkalinity, but biological regulation of alkalinity allowed for operation without alkalinity addition. Steady state operation was achieved at 30, 20, and 15 day HRTs, and digester failure occurred at a 12 day HRT. At the 20 day HRT, a sustained shock load with a 20% organic increase was easily handled by the system. Ultrasonic pretreatment did not significantly improve the operation of the system and is not recommended for future use with anaerobic digestion of thin stillage. The high VS reduction could improve water recycling within the ethanol production process. Substantial energy is produced from the system in the form of methane gas, and natural gas displacement is estimated at 43-59% for a dry grind ethanol plant. Energy production value is estimated a

Bonuses and Non-Public Information in Publicly Traded Firms

The literature on relational incentive contracts suggests that firms may be able to condition payments to employees on information that is not available to those outside the firm. Given this, market participants may use the magnitude of such payments to infer the non-public information, which then may give firms a reason to choose wage payments strategically. We combine the literatures on relational incentive contracts (from labor economics) and signaling to financial markets (from finance) and examine equilibria of a signaling game in which payments from a firm to a manager convey information regarding the firm's future cash flows. Our model reveals how the nature of the firm's relationship with its manager is affected by the firm's incentive to choose wage payments strategically. We discuss implications of our model for firms' choices over the mix of compensation instruments for top executives, as well as possible effects of executive compensation disclosure rules.

Personnel Economics: Hiring and Incentives

We survey the Personnel Economics literature, focusing on how firms establish, maintain, and end employment relationships and on how firms provide incentives to employees. This literature has been very successful in generating models and empirical work about incentive systems. Some of the unanswered questions in this area -- for example, the empirical relevance of the risk/incentive tradeoff and the question of whether CEO pay arrangements reflect competitive markets and efficient contracting -- are likely to be very difficult to answer due to measurement problems. The literature has been less successful at explaining how firms can find the right employees in the first place. Economists understand the broad economic forces -- matching with costly search and bilateral asymmetric information -- that firms face in trying to hire. But the main models in this area treat firms as simple black-box production functions. Less work has been done to understand how different firms approach the hiring problem, what determines the firm-level heterogeneity in hiring strategies, and whether these patterns conform to theory. We survey some literature in this area and suggest areas for further research.

Comparative Winter Habitat Use and Associations among Herbivores in the High Arctic

We studied winter habitat use and interspecific associations among large- and medium-sized herbivores on southeastern Victoria Island, Arctic Canada, by documenting the deposition of feces in relation to vegetation. Associations between ptarmigan (Lagopus spp.), arctic hares (Lepus arcticus), caribou (Rangifer tarandus), and muskoxen (Ovibos moschatus) were assessed using the Jaccard Index (JI) and chi² at two scales, i.e., with 1 m² and 1 ha as sampling units. JI values for species pairs were greater at the larger scale, but chi² revealed significant (positive) associations only at the smaller scale and only between arctic hares and caribou and between arctic hares and ptarmigan. Comparative use of habitats was described with respect to vegetation by canonical correspondence analysis (CCA). Ptarmigan and muskoxen were most strongly correlated with lowland vegetation and caribou with upland vegetation; arctic hares were intermediate. CCA also indicated rather wide separation in the multivariate space, further suggesting distinct patterns of habitat use. The results imply that these species were segregated in their use of resources in this High Arctic environment.On a étudié l'utilisation de l'habitat hivernal et les associations biotiques parmi les grands et moyens herbivores du sud-est de l'île Victoria située dans l'Arctique canadien, en étudiant l'emplacement des crottes par rapport à la végétation. À l'aide de l'index Jaccard (IJ) et de chi² à deux échelles (c.-à-d. en prenant 1 m² et 1 ha comme unités d'échantillonnage), on a évalué les associations entre le lagopède (Lagopus spp), le lièvre arctique (Lepus arcticus), le caribou (Rangifer tarandus) et le boeuf musqué (Ovibos moschatus). Les valeurs de IJ pour les paires d'espèces étaient plus élevées à grande échelle, mais chi² ne montrait des associations notables (positives) qu'à petite échelle et seulement entre le lièvre arctique et le caribou ainsi qu'entre le lièvre arctique et le lagopède. On a décrit l'utilisation comparative des habitats en rapport avec la végétation par analyse de correspondance canonique (ACC). Le lagopède et le boeuf musqué étaient corrélés le plus fortement avec la végétation des basses-terres et le caribou avec celle des hautes-terres; le lièvre arctique se situait au milieu. L'ACC montrait aussi une séparation relativement importante dans l'espace à plusieurs variables, ce qui laisse suggérer des modèles distincts d'utilisation de l'habitat. Les résultats indiqueraient qu'il existait pour ces espèces une ségrégation dans l'utilisation des ressources au sein de cet environnement extrême-arctique

Polaris: Mass and Multiplicity

Polaris, the nearest and brightest classical Cepheid, is a member of at least a triple system. It has a wide ($18''$) physical companion, the F-type dwarf Polaris B. Polaris itself is a single-lined spectroscopic binary with an orbital period of 30 years (Kamper, 1996, JRASC, 90, 140). By combining {\it Hipparcos} measurements of the instantaneous proper motion with long-term measurements and the Kamper radial-velocity orbit, Wielen et al. (2000, A&A, 360, 399) have predicted the astrometric orbit of the close companion. Using the {\it Hubble Space Telescope} and the Advanced Camera for Surveys' High-Resolution Channel with an ultraviolet (F220W) filter, we have now directly detected the close companion. Based on the Wielen et al. orbit, the {\it Hipparcos} parallax, and our measurement of the separation ($0.176''$ $\pm$ $0.002''$), we find a preliminary mass of 5.0 $\pm$ 1.5 M$_{\odot}$ for the Cepheid and 1.38 $\pm$ 0.61 M$_{\odot}$ for the close companion. These values will be refined by additional {\it HST} observations scheduled for the next 3 years. We have also obtained a {\it Chandra} ACIS-I image of the Polaris field. Two distant companions C and D are not X-rays sources and hence are not young enough to be physical companions of the Cepheid. There is one additional stellar X-ray source in the field, located $253''$ from Polaris A, which is a possible companion. Further investigation of such a distant companion is valuable to confirm the full extent of the system.Comment: submitted to Conference Proceedings of IAU Symp. 24