Causal Effects of Stock Options on Employee Retention: A Regression Discontinuity Approach

Whether and how employee options work in favor of the company has been the center of much debate. Taking advantage of a detailed employee-level panel data set and the predetermined option vesting schedules, we use a regression discontinuity (RD) design to quantify the causal effect of options with a vesting schedule on employee turnover. We find strong retention effects, especially at the first and the last vesting days. Increases in exit rates immediately after option vesting are on the order of 1 percent per month, and are several times the average exit rates in months before option vesting. This retention effect is very robust to alternative econometric specifications, but do vary across different levels of employees. Comparing the RD coefficients that capture the retention effect on those who delay quitting (the delayed) with estimates of the total retention effect which also include impacts on those who give up quitting altogether (the retained), we gauge the unobservable fraction of the retained and find it fairly sizable and varies quite a bit by job levels.