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

[...]In this article, we examine the wage-puzzle phenomenon ofthe 1990s. Specifically, we explore whether changes in paystructure can account for the behavior of CPH during thedecade. Labor markets have changed considerably over the pasttwenty years: workers today receive a higher portion of total compensation in such nontraditional forms as profit sharingand stock options.3 CPH captures profit-sharing payments andstock option realizations. However, employee stock options arereflected in total compensation on the date they are exercised—not on the date granted—and several years can elapse betweenthese dates. Accordingly, the growing use of these stock optionscould be affecting the time that tight labor markets are reflectedin CPH growth.By analyzing the existing data, we determine how CPHgrowth is affected by the use of employee stock options.However, given the limitations of these data, we focusprimarily on the second wage puzzle, that of the late 1990s. Wefind evidence that employee stock options may have had anappreciable impact on CPH during this period. In particular,when we recalculate compensation to reflect current stockoption grants—rather than current realizations—we concludethat there was likely no downturn in CPH growth in 1999.[...]