Stock Option Theory And Practice

Stock option is the right to offering to employee, including managers, by the enterprise owners, to buy a certain quantity of company's stock in a designated period, and the right to gain the value difference between the fair market value and the exercise price. Stock option is a kind of institutional arrangement of residual rights in firm, the nature of which is the innovation of both property institution and distribution institution.Several advantages of stock option make it a useful and generally accepted incentive tool. First, as a distribution means of share, stock option makes human capital share the same residual rights with material capital. Secondly, stock option is an efficient way to settle the problem of the principle-agent relationship inside a firm caused by the different interest of firm owners and managers. Thirdly, the purpose of stock option is to urge beneficiaries to pursue for future achievements, which encourages the potential value to be fully developed. Fourthly, the usage of "call option" principle of financial products not only brings manager profits from the business success, but also helps the firm to evade the risk of share-price falling, especially for high-tech companies in intensely competing markets. At last, as a useful incentive tool, stock option makes it possible for the firm, particularly a young one starting an undertaking, to impel beneficiaries without the expenditure of company's cash flow.With the developing pole of knowledge and technology in economy increase, relating human resources to share is becoming a tendency. The paper starts with Karl Marx's Labor Value Theory, analyzes various labor functions in business, and deduces the conclusion that stock option is a valid reward for dynamic-labor. According to the practice of stock option in our country, several conditions are given for putting stock option into practice:(1) Inside the corporation, the clearance entity, information asymmetric and double-sided selection of the incentive activities, also a scientific performance evaluation system, are necessary.(2) The institutional and market should be integrated, including statute system, tax treatment, accounting and auditing system, manager market, and essential capital market to evaluate the business performance of firms.The paper also lists some useful share-incentive methods, such as share value-added right, virtual share, conditioned share option. Based on analysis above, the author gives effective measures and suggestions to restrict irregular stock market behaviors, to enhance the research of performance evaluation and conditions listed, to improve institution systems needed for a complete capital market system.