Study On Executive Stock Option Incentive Mechanism

Stock option system, based on the innovation of stock option contract, has been used extensively as a kind of salary system to encourage the business managers. Due to the salary of manager is bound to the future stock price of the company, and accordingly, the short-term behavior of the manager can be avoided, and to certain degree, the principal-agent problem appeared after separating ownership from right of control can be solved. So to speak, stock option is a long-term incentive system based on the match of return and risk. . Stock option system has obtained great success at actual application, but also aroused some problems and caused extensive dispute. In recent years, some well-known companies have adopted the stock option system, however, a series of behaviors that managers take great moral hazard to disobey the shareholder's benefits have happened. For both theoretic research and practical application, it is important to study and analyze the incentive mechanism of stock option system and to discover the requirements to produce incentive effect.This dissertation studied the three important aspects of the incentive mechanism of stock option system through building mathematic model based on game theory, information economics and economics principle. First, the dissertation studied the efficiency of sorting managers after adopting stock option system. It shows that the adoption of stock option system can availably evade the low-ability managers from pretending to be of high-ability, and make the shareholder to have more possibility to choose manager of high ability, so to reduce the cost.Then this dissertation studied the incentive mechanism and its influences to the enterprise's development in long-term. It shows that the expecting return of managers can be connected with the short-term and long-term performance so to make managers to focus on the enterprise's development in long-term. Therefore, the incentive compatibility between shareholder and manager can be realized theoretically and to certain degree, the principal-agent problem can be solved. Meanwhile, it compared the traditional salary system and pointed out that fixed salary system is the least effective, while the annual salary ignores the long-term performance of the enterprise and can notmaximize the shareholders' utility. Finally this dissertation studied the requirements to produce incentive effect after adopting the stock option system on foundation of the specializing moral hazard of managers and achieved the optimal incentive and supervised contract and other four elemental conclusions.In the last part, it comparatively analyzed the application of shock option in domestic and foreign countries, and discussed the obstacles that stock option system encountered in China: corporate governance, the efficiency of stock market, agency institution, finance and accountancy laws etc.