Abstract
The moral hazard literature suggests that equity pay cannot provide meaningful incentives to non-executive workers due to the free-rider problem. Yet, large firms routinely use such pay for the explicit purpose of incentive provision. I revisit this puzzle in a parsimonious model of worker engagement. Being engaged makes the worker more productive and better able to assess the firm's future performance. Equity pay correlates with firm performance and motivates the worker to be engaged in order to resolve income risk, which complicates the worker's interim consumption planning. The model's predictions are consistent with many stylized facts, such as the propensity of riskier firms to offer equity pay. The model also generates novel testable implications linking the worker's interim consumption decisions to firm-level outcomes following the adoption of equity pay.