Therearethreeformsofequitycompensation.Theoldestand
mostestablishedoneistogivestockorequityinthefirmto
management, employees, or otherparties as compensation.
This second is a variant, with common stock and equity
granted to employees with therestrictionthat these shares
cannotbeclaimedand/ortradedforaperiodafterthegrants.
Thethirdisequityoptions,allowingemployeestobuystock
inthefirmataspecifiedpriceoveraperiod;theseusually
come with restrictions as well.
Inrecentdecades,equity-basedcompensationhasbecomea
bigger part of overall employee compensation, initially at
U.S.firmsandmorerecentlyinothermarketsaswell.There
are four major factors behind this trend:
1.Stockholder-manageralignment.Aspublicly tradedfirms
havematuredandbecomelarger,theinterestsofstockholders
(whoownthesefirms)andmanagers(whorunthesefirms)
havediverged.Theresultingagencycostshavebeenexplored
widely in the literature. In a seminal work, Jensen and
Meckling (1976) argue that managers, acting in their best
interests, often take actions that destroy stockholder value.
1 Researchershaveshown thatmanagers,leftto theirown
devices, accumulatetoo muchcash, borrow too little, and
makepoorinvestments andacquisitions. Offeringequityin
the firm to managers may reduce the agency problem by
making managers behave more like stockholders.
2.Scarcityofcash.Theshifttowardequitycompensationwas
mostpronouncedattechnologyfirmsintheUnitedStates.In
particular, young technology firms entered the market in
drovesin the1990s,manywithlittleto reportin termsof
revenuesorearnings.Giventheircash constraints,theonly