Bo Wang, Haizhi Wang, Michael Wang, and Xiaotian Tina Zhang Managerial Finance, Vol. 51 No. 12, pp. 1817-1830.

DOI: https://doi.org/10.1108/MF-09-2024-0678

What the paper is about

Labor unions are conventionally understood as wage negotiators, but the wage premium they once secured for members has been shrinking, and unions appear to have shifted their attention toward non-wage benefits such as pensions, health coverage, and profit sharing. We ask whether that shift also shows up in a less-studied part of the compensation package, stock options granted broadly to rank-and-file employees rather than to executives.

The empirical challenge is that whether a union forms at a firm is not random, so a simple comparison of unionized and non-unionized firms could just as easily reflect whatever made a firm prone to unionization in the first place. We get around this using a regression discontinuity design built on union representation elections. Firms where the union barely wins the vote and firms where it barely loses should look similar on average, both observably and unobservably, so the difference in what happens afterward can be read as the effect of unionization itself rather than of the underlying firm.

Using 236 NLRB-supervised union elections between 1993 and 2006, matched to compensation data from Compustat and Execucomp, we find that rank-and-file employees receive noticeably larger stock option grants at firms where the union election passes than at firms where it narrowly fails. The result holds across different polynomial specifications of the running variable and under local linear regression discontinuity estimates near the vote threshold.

The pattern lines up with the “two faces of unionism” framework, monopoly bargaining power on one side and collective voice on the other. The effect is larger where unions appear to hold more bargaining power, in human-capital-intensive firms and in firms with concentrated rather than diversified sales, and larger where free-rider concerns among employees are less severe, in smaller firms and in firms with more growth opportunities per employee. The effect is also more pronounced when CEOs look entrenched by measures like cash pay and the E-index, consistent with executives using option grants to keep labor relations calm rather than negotiate hard over them.

We also check whether the options that follow unionization behave like real incentives rather than a token benefit. Firms show higher stock return volatility and higher capital expenditure in the year after a union election win, which is consistent with rank-and-file employees responding to the risk-taking incentives that stock options are designed to provide.

Highlights

  • Rank-and-file employees receive significantly more stock options after a union election win.
  • A regression discontinuity design around close elections supports a causal reading.
  • The effect is larger when unions hold more bargaining power.
  • The effect is larger where free-rider concerns among employees are less severe.
  • Entrenched CEOs grant more stock options to employees during union negotiations.
  • Post-election option grants coincide with higher stock volatility and capital spending.