Marc Andreessen has a good post on incentives. Based on Poor Charlie's Almanac, it goes to explain how RSU's and stock options can make a difference to incentives. If an employee gets an option to buy a stock of the company at INR 100 there is absolutely no pay off as long as the stock is valued at 100. The employees have a pay off only if the value of the company increases - i.e the options motivate employees to add value to the company. Whereas stock grants, don't motivate employees the same way as options. They employees sure gain more if the stock rises to 200 but are going to make money anyway even if it stays at 100. That surely does not motivate employees well enough to increase firm value. RSU's in my opinion are just bonuses for past performance. Neither should the employees nor employers perceive it as an incentive future performance. In the short run employees who receive grants may work harder out of sheer momentum from the pat they received on their backs but that will not last long. Eventually employees just do enough to preserve value.And when that happens for long enough, especially in an industry like technology, it ultimately hurts the company. When everyone works towards preserving value , its certain that soon this culture will diminish value.
Marc has a blurb on how Microsoft decided to give RSU's as against options which eventually led to the stock being flat since 2000.
Surely, options are better suited at startups where each employee has a clear idea of how his or her actions will impact company value. For larger companies however it is difficult to justify doling out options to lower rung employees. Most of the rank and file employees cannot impact firm value solely on their actions. Stock grants are a better way to compensate employees.However executives and senior management who oversee a business unit should be compensated only in stocks. I hope that is the case with Microsoft, if not then definitely Marc is right. One should never underestimate the power of incentives and neither should one overestimate the power of bonuses. Bonuses are not incentives.
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