A Research On ESO As An Incentive System In Chinese Enterprises

Executive Stock Option(ESO) is a kind of internal distribution system that enterprises have been using to encourage executives to work hard for the purpose of developing the enterprise with the separation of ownership and control. Since 1990s, ESO has been prevailing in America and has been playing a due encouragement role in the practices. As for our country, along with the setting-up of modern enterprise system and rapid development of capital market, principal-agent problem becomes worse. In order to solve this problem, some enterprises in our country have already adopted ESO. But since the accounting frauds of Enron and WorldCom at the beginning of the 21st century, ESO has encountered unprecedented suspicion and heckling. Meanwhile, the application of ESO is restrained by a series of systems in China at present, and it is still irregular. Based on facts above mentioned, it's really necessary, we think, to reexamine ESO and make a prospective study of it for the purpose of standardization.This paper firstly studies basic theory of ESO and the application of ESO system at domestic and abroad, then on the basis of that, probes into a great deal of obstacles which ESO localization is confronted with, puts forward the countermeasures and suggestions to clear away these obstacles. We consider that, the slow development of capital market, manager market, and product market; as well as the vacancy of laws and regulations, contributes to the obstacles of ESO's application in our enterprises in a macrocosmic aspect; whereas the imperfect corporate governance structure and the unreasonable manager achievement appraisal system form the obstacles in a microcosmic aspect. We deem that our country should adopt fair value based method to deal with ESO accounting measure; special laws and regulations should be enacted and Corporation Law as well as other relevant laws should be modified moderately to standardize the application of ESO; Meanwhile, because executive achievement appraisal system concerns the success or failure of the whole plan of ESO, we propose one kind of comprehensive achievement appraisal system combined with balanced scorecard, EVA and relative EVA, so as to appraise executives' performance fairly and rationally.