ESO: A Kind Of Advanced Incentive And Constraint Mechanism

The ownership organizing system of modern enterprise is the organizing innovation of economizing trade expenses, having the incomparable advantage over classical enterprise. However, the separation of ownership and operation in modern enterprise brings about the issue of agency. The dissymmetry of information resulted in the owner's incapability of supervising the operator. The departure of the utility function also makes the handlers probably sacrifice the shareholders' interests for the sake of their own. Consequently, the principal (owner of the enterprise) must give the agent(the operator) appropriate, effective and permanent stimulation to reduce the interests differences between them. Meanwhile, they should spend a certain amount of supervising costs to reduce and even restrict the agent's behaviors which may depart from the principal's interests. Based on this, to establish and improve an incentive and constraint mechanism which pays equal attention to the stimulation and constraint has become the urgent affairs of modern enterprises.Executive stock option mechanism makes it possible that the operators enjoy the remains of the enterprise. It can connect the interests of the operators with those of the enterprise. It has been provedby the practice that under certain circumstances, stock option mechanism can effectively exert its function including stimulation and constraint. Since Pfizer Corporation of America set up the first manager stock option, the enterprises in western developed countries such as American have widely adopted this mechanism.Nowadays, about 89 percent of the first 500 biggest enterprises have established stock option stimulating mechanism which is designed for their senior managers. This mechanism produced obvious promoting effect to the development of the enterprise and the continual increase of the national economy. In recent years, the enterprises in China began to experiment the stock option stimulating mechanism and have done many beneficial explorations. However, it ran into a lot of problems in the process of practice. How is China carrying out this mechanism at the present time? How about the implementing surroundings in China? Under this circumstances, what is the effect of implementing this mechanism? How to improve its effectiveness? They are the realistic problems that we are confronted with.This essay illustrates the functions principles of stock option mechanism with the human capital ownership theory, principal梐gent theory and incentive theory. It also makes analysis of the exertion of its effectiveness. Taking Shanghai, Wuhan and Beijing for examples, the essay discusses the common problems in the process of implementationof this mechanism in China. In the end, based on the improvement of its effectiveness, the essay prompts several suggestions on how to solve the problems including the source of the capital, legal surroundings, taxes and how to establish an effective manager market.