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The Psychology of Employee Stock Options: Testing a New Conceptual Model

Katherine J. Klein The Wharton School, University of Pennsylvania Edward J. Carberry Rotterdam School of Management, Erasmus University Beyster Fellow Mathis Schulte HEC Paris. The Psychology of Employee Stock Options: Testing a New Conceptual Model. Overview.

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The Psychology of Employee Stock Options: Testing a New Conceptual Model

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  1. Katherine J. Klein The Wharton School, University of Pennsylvania Edward J. Carberry Rotterdam School of Management, Erasmus University Beyster Fellow Mathis Schulte HEC Paris The Psychology of Employee Stock Options: Testing a New Conceptual Model

  2. Overview • What are the consequences of stock options on individual level attitudes and behaviors? • What are the conditions under which stock options lead to positive (negative) outcomes? • Survey data from over 1,275 employees in 8 publicly traded firms

  3. Current Landscape of BBSOPs • BBSOP: grants options to a majority of full-time employees • Continues to be a significant trend • GSS (2006): 9% hold options • NCEO (2010): 3,000 firms and over 10 million employees • Existing research (Aldatmaz & Ouimet 2011) • Reasons for adoption • Effects on corporate performance

  4. Enduring Questions • Very little individual level research • Do options enhance retention? • Do options enhance motivation? • Do options allow companies to select or retain the right types of employees? • If so, what drives these effects? • Under what circumstances are options most likely to enhance positive employee behaviors and attitudes?

  5. The Conceptual Model • Central construct: stock options enthusiasm • Affective reaction to receiving stock options • Seven item measure • How do employees regard stock options? • Excitement, gratitude, and appreciation? • Indifference? • Disappointment and cynicism? • Consequences of enthusiasm • Antecedents of enthusiasm • Antecedents of the antecedents

  6. Consequences of Enthusiasm • Enhances organizational commitment (H1a) • Motivates ownership behavior (H1b) • Reduces turnover intentions (H1c) • Motivates work effort (hours of work) (H1d)

  7. Antecedents of Enthusiasm • They expect strong financial gains (H2) • They feel that they understand how options work (H3) • They believe that options are provided as a way to share the wealth (H4)

  8. Antecedents of Expected Gains • Employees expect strong financial gains when • The company has performed well in the past (H5) • Employees’ current options look promising (H6) • Employees have experienced financial gains from options in the past (H7) • Cashed options previously (7a) • Value of cashed options (7b) • Employees are optimistic about the future • Perceived employee influence on stock price (H8) • Expected stock price in one year (H9)

  9. Antecedents of Understanding • Employees perceivethat they understand stock options when their objective knowledge of stock options is high. (H10) • Employees’ objective stock options knowledge reflects • Company communications (H11) • Prior experience with options (H12) • Knowledge and interest in financial affairs (H13)

  10. Organizational Commitment Stock Price Change in Preceding Year Current Stock Options Portfolio Expected Financial Benefits of Stock Options Past Stock Options Experience Turnover Intentions Future Expectations Stock Options Enthusiasm Employee SO Attributions Ownership Behavior Perceived Understanding of Stock Options Company Communication Typical Hours of Work Interest in Financial Affairs Objective Stock Options Knowledge Prior Stock Options

  11. Method: Sample • Data collected in 2002 • 1,275 employees in 8 public companies • Financial services (1) • Manufacturing (7) • Mean company size in 2001: 3,159 employees • Option plan characteristics • Mean % employees with options: 94% • Mean % hourly workers with options: 83%

  12. Method: Sample • Demographics • 70% male, 81% white, 66% college-educated • Job Categories • 14% hourly employees • 46% salaried and sales employees • 21% supervisor or middle manager • 19% senior manager and executive • Mean respondents per company: 160 • Firm over 300: stratified random sample by broad occupational group

  13. Measures: Attitudes • 5 point Likert scale on most items (1 = strongly disagree, 5 = strongly agree) • Stock Options Enthusiasm (7 items) • It is exciting to receive stock options in this company. • I do not really care about the stock options I have received here. • Stock options are over-rated as an employee benefit. • This company’s stock option program is fair. • I am very happy to have stock options in this company. • I feel like a real owner in this company. • This company’s stock option program is generous.

  14. Measures: Attitudes and Behaviors • Organizational Commitment (7 items) • Turnover Intentions (3 items) • Ownership Behavior (3 items) • Hours of Work (3 items) • Expected Financial Benefits (4 items) • Perceived Understanding (6 items) • Stock Option Attribution (2 items) • Employee Influence on Stock Price (2 items) • Objective Knowledge of Options (6 items) • Knowledge of Financial Affairs (4 items) • Current Stock Options Portfolio (4 items) • Past Stock Options (2 items) • Future Expectations (1 items)

  15. Measures: Company-Level Variables • Company Communications about Stock Options (4 items, aggregated) • This company goes to great lengths to teach employees the value of stock options • Stock Price Change in Preceding Year • Objective measure of change in stock price in the year preceding survey data collection in the company

  16. Analyses • Hierarchical linear modeling • Individuals nested within companies • All analyses control for • Demographics: gender, age, race, education, tenure, salary, job category • Work Attitudes • Satisfaction with Pay • Satisfaction with Supervisor • Intrinsic Job Characteristics • Participation in Decision Making

  17. Results • The greater employees’ stock options Enthusiasm • The greater their Organizational Commitment • The lower their Turnover Intentions • The greater their Ownership Behavior • The longer their Hours of Work

  18. Results • Stock 0ptions Enthusiasm is predicted by • Expected Financial Benefits from Stock Options (.42) • Effect is stronger at lower levels of expected financial gain • Perceived Understanding of Stock Options (.10) • SO Attributions • Share the wealth: positive effect (.11) • Below-market pay: negative effect (-.13)

  19. Results • Expected Financial Benefits predicted by • Current Stock Options Portfolio (number of options held, proportion of SO in the money, value of vested and unvested options) • Past Experience with Stock Options • Future Expectations (about stock price and about their influence over it) • Stock Price Change in Preceding Year (NS)

  20. Results • PerceivedUnderstanding of Stock Options is predicted by Objective Knowledge of Stock Options • Objective Knowledge of Stock Options is predicted by • Exercised Stock Options Before • Knowledge of Financial Affairs • Company communication (NS)

  21. Organizational Commitment Stock Price Change in Preceding Year Current Stock Options Portfolio Expected Financial Benefits of Stock Options Past Stock Options Experience Turnover Intentions Future Expectations Stock Options Enthusiasm Employee SO Attributions Ownership Behavior Perceived Understanding of Stock Options Company Communication Typical Hours of Work Education Objective Stock Options Knowledge Prior Stock Options

  22. Discussion and Implications • Towards a psychology of stock options • Stock options influence employee attitudes and behavior, but only when employees are enthusiastic about having them • What drives stock options enthusiasm? • Difficult to value easily and accurately: role for expectations, attributions, and perceptions • Expected gains: current portfolio, past wins, future expectations • Perceived understanding and perceptions of fairness: much smaller effects

  23. Discussion and Implications • Responses to options may not be rational • Past history with options and expected financial gains • Number of options • The dark side: a double-edged sword? • Enthusiasm: a boon to commitment, retention, ownership behavior • Cynicism: a detriment to commitment, retention, ownership behavior, work hours • Existing work has shown that underwater options hasten executive turnover (Dunford et al, 2005)

  24. Discussion and Implications • What is the role of ownership culture and communication in building realistic expectations and grounded enthusiasm? • How do we understand the role of financial incentives on employee attachment • How do employees evaluate and make sense of more complex financial ties to the firm? • How does this understanding shift in perpetually volatile financial markets? • Need for deeper explorations of the meaning, emotional responses, and power of money

  25. Thank you!!!

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