THE USE OF STOCK OPTIONS AND RETIREMENT PLANS TO RETAIN NON-EXECUTIVE EMPLOYEES

Firms expend significant resources to retain employees. In this paper, we examine how firms that use stock options grant them differently when they also utilize retirement plans in non-executive employee compensation contracts. Using a large sample of US firms, we examine the relation between the stock option proportion of pay of non-executive employees and firms ’ use of a retirement plan of any type. We then examine how firms ’ use of stock options is affected by the type of plan (defined benefit or defined contribution) used by the firm. We find that firms reduce their use of stock options when there are other deferred pay mechanisms in place, suggesting they act as substitutes. We also find that firms with defined benefit retirement plans reduce their use of stock options for non-executives to a greater extent than firms with defined contribution plans, suggesting a greater degree of substitutability between defined benefit plans and stock options than between defined contribution plans and stock options