Encouraging Employee Engagement: The Role of Equity Pay

Department: Finance

Speaker: Alvin Chen (Stockolm School of Economics)

Room: T020

Abstract

Despite the moral hazard literature suggesting that equity pay cannot provide meaningful incentives to non-executive workers, large firms routinely use such pay for the explicit purpose of incentivization. I revisit this puzzle in a parsimonious model of worker engagement. Engaged workers are more productive. At the same time, they are better able to assess the firm's future performance. Equity pay correlates with firm performance and motivates workers to engage as a way of resolving income risk early. The model's predictions are consistent with many stylized facts, such as the propensity of riskier firms to offer equity pay. The model also generates novel testable implications linking the worker's preference for early resolution of income risk to firm-level outcomes following the adoption of broad-based equity-based pay.