Employees' Choice Of Method Of Pay

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Executive Summary

Who chooses what type of pay? The costs and benefits of "Flexible" and "Cafeteria-style" benefit plans have been discussed for some time. Additionally, many papers have considered the potential costs and benefits of certain types of pay plans. In this paper, the authors use detailed data from a specific firm that annually set the total compensation level for each of its employees but then did something extremely unusual. At the start of each pay year, the firm set an exchange rate for the dollar trade-off between cash pay and stock option pay. It then gave every employee nearly complete choice over the fraction of their pay that was contingent (stock options, bonus) versus guaranteed (salary).

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