Research on the Behavioral Impact of Stock Options

How do stock options affect employee behavior? Traditional economics suggests that holding options gives employees an incentive to promote future company success, but a new approach based on the psychology of gift exchanges suggests that exercising options creates a sense among employees of a reciprocal obligation to the company. Two researchers from the Wharton School, Peter Cappelli and Martin J. Conyon, published an extensive analysis of option awards, option exercises, and on-the-job behavior of 4,500 individual employees in a paper titled "Stock Option Exercise and Gift Exchange Relationships: Evidence for a Large US Company" and published the National Bureau for Economic Research. Their results are especially robust because the conditions under which the options were granted and the extensive data covering more than seven years in a single publicly traded company created a quasi-experiment.

Captelli and Conyon found that both traditional and gift-exchange hypotheses explained employee behavior. In particular, they noted that "[h]igher profits [from exercising stock options] in turn cause them to reciprocate with better job performance in the subsequent period." In other words, an option grant affects behavior before and after exercise. They conclude, "We find significant and economically meaningful positive relationships between the variation in profit per share of the options sold and standard measures of subsequent job performance for individual employees." Their research is available as NBER Working Paper No. 16814 (February 2011).