Why Firms Award Stock Options -- Examining the Design of Employee Stock Options

This study explores whether firms grant employee stock options to motivate and retain employees by examining the determinants of the use of option grants and how firms design vesting and maturity restriction terms. The results show that there is a relationship between the granting of stock options and the retaining of employees and motivating long-term profit-maximizing behavior. This study also finds that a firm sets more rigorous restrictions on exercising options when retaining employees is a high priority for a firm. The results suggest that firms not only grant stock options to provide performance and retention incentives for employees, but also amplify the effects of incentives by fine-tuning the rules governing the exercising of option grants.