New Study Looks at Impact of Executive and Broad-Based Options

In "Executive and Broad-Based Stock Options: Evidence from U.S. Panel Data," James Sesil of Rutgers and Yu Peng Li of the State University of New York at Buffalo look the performance of 291 companies after the introduction of both executive and broad-based options. The data included 193 firms identified by the NCEO as having plans that provided options to at least most full-time employees meeting minimal service requirements. Performance data were analyzed from 1983 through 2002. Using various methodological approaches, the researchers controlled for both industry effects and such firm-level effects as quality of management. After the introduction of a stock option plan, productivity increased 26% over what would have been expected, remaining 21% higher even after five years. By contrast, the introduction of a broad-based plan had a similar impact on productivity immediately after the introduction of the plan, but the effect diminished significantly over time.

The study did not assess the size of the grants, merely whether a company had any kind of plan. It also could not control for whether the companies adopted plans because they anticipated improvements in performance. The authors point out that broad-based plans often are one-time grants, whereas executive programs are typically repeated regularly. Moreover, NCEO data have shown that the performance effects of employee ownership are strongly dependent on creating an ownership culture but that only a minority of broad-based option plans have established such a management system.