Unlocking Firm-Specific Knowledge through Employee Delta

This paper examines whether, and to what extent, rank-and-file employee equity incentive Delta (Employee Delta ), the pay-performance sensitivity of employee’s equity holding, influences the knowledge deployment strategy. Exploiting a unique dataset that directly captures previously unexplored rank-and-file employee equity incentive plans and their design features, we provide three main findings: First, employing an instrumental variable approach, we document a positive causal relationship between employee Delta and firm-specific knowledge due to prudent risk-taking incentive. Second, this effect is stronger when the grants are given to core-technical employees, performance hurdles are not extremely challenging, vesting is weighted towards later periods, grant is broad based and firms are older. Third, we show that employee Delta promotes firm-specific knowledge through two channels: the accumulation of specialized knowledge and the extension of employees’ contribution horizons. These findings suggest that carefully designed equity incentives for rank-and-file employees (especially core-technical employees) can play a critical role in deploying firm specific knowledge, thereby enhancing long term competitive advantage.