We develop a model to illustrate that equity-based compensation for non-executive employees and product market decisions are related. When the product market is competitive and employees have low bargaining power , the unique equilibrium is for each firm’s owners to offer equity-based compensation to their employees. In this setting, equity-based compensation leads to a lower wage rate, which makes each firm more competitive with its rival. However, this unique equilibrium is a Prisoner’s Dilemma for the firms’ original owners. Our results are consistent with several empirical regularities and provide predictions on when firms will offer equity-based compensation to their employees.