Study On The Development Of Executive Stock Option In China

Executive stock option (hereinafter referred to as ESO) is a contract that gives the senior management the right, but not the obligation, to buy a share of stock at a pre-specified exercise price for a pre-specified term. To be honest, a company's success right now largely depends on whether or not that company could win the battle for global talents, so it is very important to keep those who are capable or competent on board. In this regard, the ESO is an efficient incentive plan by fully and fairly compensating the hard-working people who deserve it. More importantly, it's also an effective method to reduce the agency costs because the ESO helps to keep the similar or even same interests between the principal (shareholders and company) and the agent (mostly senior managers).The Executive Stock Option was invented in the United States in late 1970s. After its birth, it developed gradually and its benefits were recognized by both scholars and companies. With the Bull Market in 1990s, the utilization of ESO experienced an explosive growth. According to the statistics, in 1992, firms in the Standard & Poor's 500 granted their CEOs options worth a total of＄11 billion at the time of grant; by 2000, option grants in S&P 500 firms increased to＄119 billion. But the bankruptcy of Enron put a sharp brake on the rapid expansion of the ESO use. Although the Executive Stock Option didn't need to bear all the responsibilities for this scandal, in fact, it was viewed as the driving force to spur those senior managers to conduct risky behaviors and then put the entire company at stake. Right after the scandal, the scheme of Executive Stock Option was fully analyzed, and its benefits and disadvantages were revalued. By 2002, option grants in the S&P 500 had fallen to＄71 billion, well below their peak but still a six-fold increase from a decade earlier. So far, it is still one of the important and most-used incentive plans in the United States.Next, let's shift the focus to the other side on earth. The Executive Stock Option was first brought into China in around 1990s. In view of the fact that the Chinese stock market was just established, the government took a strict policy toward those financial innovations and compensation plans. Additionally, other factors like the legal environment, the efficiency of stock market, the development in human capital market, and so forth restricted the ESO to step forward. That's why the Executive Stock Option kept relatively quiet until 2006 although during that time period, some metropolises like Shanghai, Beijing, respectively conducted their own practices. But truthfully, they were not the real ones. The milestone event happened in 2006 when the Chinese Stock and Exchange Commission issued a specific regulation with regard to the ESO use in listed companies. After that issuance, more and more companies were on the way to set about their various practices. In 2009, the Chinese Growth Enterprise Market (like NASDAQ in the U.S.) was set up, which aimed at accommodating small or medium-size companies that are desperate in need of capital to expand and grow. And meanwhile, the establishment of the Chinese GEM provided a good opportunity to enhance the ESO use since the attributes of ESO could perfectly match what the GEM specialized. Certainly, the challenges we face are real and they are many, like less forceful regulations, imperfect corporate governance, and less effective compensation plan design, we should be-confident that if we continue on the path and try our best to address those problems one after another, we can enjoy a bright future.The whole thesis includes three parts, namely preface, main text, and conclusion. The main body is further divided into six subsections as follows:The first chapter outlines the ESO itself, which includes the definition of ESO, its workflow, attributes, and classification.The second chapter describes the relating theories underlying the use of ESO.The third chapter details the scheme design of a ESO plan.The fourth chapter states both sides of the ESO use, positive function and negative impact.The fifth chapter sets forth the ESO practice in the United States, including its history, features, and reasons for escalation in 1990s and decline in 2000s.The last chapter focuses on the development of ESO in China, containing its previous status and current situation, the challenges we face to expand its use, the useful experiences we had tried, and the specific goals we should fight for in the future.