We develop a model to illustrate that equity-based compensation for non-executive
employees and product market decisions are related. When the product market is com-
petitive and employees have low bargaining power, the unique equilibrium is for each
firm's owners to o¤er equity-based compensation to their employees. In this setting,
equity-based compensation leads to a lower wage rate, which makes each firm more
competitive with its rival. However, this unique equilibrium is a Prisoner's Dilemma
for the firm's original owners. Our results are consistent with several empirical regu-
larities and provide predictions on when firms will o¤er equity-based compensation to
their employees.
Employee bargaining power market competition equity compensation