| An Employee Stock Ownership Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company. It originated in the United States in 1970s and developed rapidly. After that, it was adapted and then adopted in U.K. and Japan. In 1980s, it also began to emerge in China and, in 1990s, developed under regulation. The purposes of applying ESOP vary, including providing welfare for employees, obtaining favorable tax rates, and promoting productive efficiency and so on. Among all these, promoting productive efficiency and performance is a very important one. But positive studies have not come to any uniform conclusion about whether ESOP can promote performance dramatically. This paper is going to analyze the relationship between ESOP and performance theoretically, which is quite important to the theories and the practice of Chinese economic reform.ESOP will be interpreted briefly in the first part. Louis O. Kelso, an American attorney, introduced the concept of ESOP in 1950s, aiming at the serious gap between the poor and the rich. He claims that by applying ESOP and employees' sharing capital revenues, gap between the poor and the rich would be reduced and the society would finally go into the people's capitalism. Later, Long, one of American conscript fathers accepted the idea of ESOP and launched a campaign of applying it by legislation. As a result, a series of acts had been ratified during 1974 and 1984. Thus ESOP developed rapidly in America. And since 1960s and 1970s, ESOP also spread in UK and Japan. The fundamental principals of ESOP have three points: participation, limitation and distribution according to contribution. The typical applying style of ESOP is the American style that can be divided into two categories: leveraged ESOP and non- leveraged ESOP. American ESOP has some prominent characteristics: employees do not pay anything; the stocks distributed to any employee must be quantified and managed collectively by specialized credit institutions; employee stock-holders has the rights of sharing revenues and voting; but they are restricted when transferring stocks. The main purposes of applying ESOP are providing welfare for employees, obtaining favorable tax rates, and promoting productive efficiency.How ESOP influences the performance through changing the arrangements of residual claim will be discussed the second part. A model will be used to analyze how residual claim stimulate employees and two conclusions will be drew. The first is that applying ESOP and letting employees share residual claim can certainly stimulate them, but the effect will not be distinct in all circumstances. The second is that ESOP can generate tremendous stimulating effects in firms where a great part of stocks is distributed by ESOP; there are relatively less employees, but explicit specifications and active corporation culture; the elasticity of output to labor is high.How ESOP influences the performance through changing the arrangements of rights of control will be discussed in the third part. The importance of letting employees share rights of control will be discussed first. By providing a case study of American ESOP, the effects and conditions of employees' sharing rights of control will be analyzed secondly and two conclusions will be drawn. One is that ESOP can promote performance to some degree if it can guarantee employees' rights of control as stock-holders and stake-holders, let them take part in the important decisions of that company, provide enough stimulation from rights of control, and reduce agency costs by employees' monitoring. The second is that the key of guaranteeing employees' sharing of rights of control is to increase the proportion of stocks owned by ESOP, give them complete voting rights, and strengthen the functions of ESOP committee as the voting agent of employees.How ESOP has been applied in China will be described in the forth part. In 1980s, it began to emerge in China. After that, the development of its growth has experi...
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