Job Hunting

Stock Options Get a Nod from B-Schools

Three business school professors claim stock option grants increase company earnings-per-share.
Lisa YoonDecember 10, 2002

As the debate continues over executive stock options, the pro-options camp scores a thumbs up from a new study penned by three business school professors.

The report, released in September, claims that in the long term, employee stock options (ESO) grants actually do what they’re intended to do in theory—align executive interests with those of shareholders.

The study, authored by Terry Shevlin of University of Washington Business School, Shivaram Rajgopal of Duke University’s Fuqua School, and Michelle Hanlon of University of Michigan Business School, found that for every dollar in stock options a company gave its top five executives, that firm’s earnings-per-share increased an average of $2.85 over the next five years.

The study surveyed more than 1,000 companies and looked at ESO grants awarded between 1992 and 2000, and earnings from between 1998 and 2000.

In addition, the authors examined the reasons for granting options and found that, in most cases, company executives use option grants for “agency problems,” such as cash constraints that preclude larger salaries, or the goal of improving financial performance.

There are caveats though. “The study doesn’t say there’s no room for error,” says UM accounting professor Hanlon. “Nor does it say that if a firm gives one more stock option it will be that much better off.”

Among other acknowledged qualifiers, the study notes that the reasons for granting options may not be complete. Another caveat (and it’s a big one): the authors “assume reported earnings are an unbiased measure of firm performance.”

Still, the research points out that despite the bad press that stock options received after the Enron and WorldCom scandals, over time—and in a broad spectrum of companies—firms are better off after granting options. “ESOs serve a purpose, and usually that purpose is being well-served,” notes Hanlon.

Volunteering for a Promotion?

Speaking of aligning interests: This month, insurance giant Safeco is launching an employee volunteer program designed to develop employees’ job skills and help position them for career advancement.

“Building Skills through Volunteerism” matches volunteer projects with Safeco’s core competencies, giving employees a chance to help their fellow man, while helping their own chances for promotion. Under the program, employees choose skills they want to develop, and select a volunteer projects accordingly. For instance, employees can hone their budgeting and planning skills by running a food drive; or learn people-management skills by leading a volunteer group. In addition, supervisors are encouraged to consider volunteer efforts when it’s employee review time.