Case for employer-funded exchange-traded stock options as an alternative to stock-based employee compensation

Increasing stock-based compensation has been shown to elevate employee motivation to improve firm performance, thereby increasing shareholder equity and firm value. An analysis of 80 firms in the S&P 500 reveals that employee stock-based compensation (SBC) can exist in many forms and there is widespread inconsistency in nomenclature and reporting practices. Most large firms engage in the practice of repurchasing stock as a mechanism to return value to shareholders or to signal undervaluation, while simultaneously issuing stock to employees. This practice can be detrimental to shareholders. Extant literature has not explored this topic and its possible remedies. This research investigates (1) whether well-established and mature stock repurchase programs at exchange-listed S&P 500 firms are correlated to employee stock-based compensation programs, which could dilute earnings per share (EPS), (2) explores if firms could use alternative financial instruments, like exchange-traded stock options, to continue to compensate and motivate employees, and (3) explores if the reduced cost of exchange-traded stock options reduces the potential dilution effect of stock-based compensation, and improves shareholder equity and firm value through higher earnings per share (EPS). This research hopes to make a significant contribution to the field of corporate strategy, corporate finance, academia, and has implications for practitioners and shareholders.