Economic Policy Review

The Effect of Employee Stock Options on the Evolution of Compensation in the 1990s

December 2001Volume 7, Number 3
JEL classification: G3, G10, J3, J33

Authors: Hamid Mehran and Joseph Tracy

Between 1995 and 1998, actual growth in compensation per hour (CPH) accelerated from approximately 2 percent to 5percent. Yet as the labor market continued to tighten in 1999, CPH growth unexpectedly slowed. This article explores whether this aggregate "wage puzzle" can be explained by changes in the pay structure—specifically, by the increased use of employee stock options in the 1990s. The CPH measure captures these options on their exercise date, rather than on the date they are granted. By recalculating compensation per hour to reflect the options' value on the grant date, the authors find that the adjusted CPH measure accelerated in each year from 1995 to 1999.

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