We construct a measure of employees’ outside opportunities within the local labor market and examine how firms choose policies to retain employees with such opportunities. We find that firms grant more rank and file stock options, provide a more employee-friendly work environment, and maintain higher levels of financial flexibility (higher cash balances and lower financial leverage) when employees have more outside options in the local labor market. These relations are stronger among firms relying more on high skill workers and investing more in research and development. In a quasi-natural experiment involving employee mobility shocks following the adoption of Inevitable Disclosure Doctrine by U.S. state courts, we further show that the recognition of the doctrine attenuates the effects of our measure of employees’ outside opportunities on the retention policies.

JEL classification: G32, J21, J33, J42, M14
Key words: Labor Force Composition, Stock Options, Corporate Social Responsibility, Working Conditions, Financing​