Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 10

In 1995, Philip Morris Company ratified a new labor pact that gave employees stock in lieu of pay increases. The agreement covered 7,800 employees, with each employee being given 94 shares (1994 value of about $60 per share). Employees cannot sell the stock for at least a year and forfeit the stock if they quit or are fired before the year expires. Business Week [1] argued that the "deal was good for Philip Morris" because the employees' base pay and fringe benefits did not rise. Also "current shareholders' shares won't be diluted, since employees probably will get less than 500,000 shares out of 850 million outstanding." Discuss the pros and cons of this policy compared to a policy of simply giving a cash bonus to employees of a similar dollar value.