Research On The Incentive Effect And Problems Of The Executive Stock Options Of China Listed Companies

Executive Stock Options(ESO) as a long-term incentive, in the West has been sixty years right now, but in China has just begun. The practice abroad has proven it to be one of the effective way to resolve the authorizing problem between the Shareholders and the agents in listed companies .The means of Executive stock options is to permit the senior management staff ,led by the CEO to purchase the company's common stock at a fixed-price within a particular period of time in the future. Meanwhile, it benefit the company by making the managers feel that their performance is attached to the value of the stock. Implement of executive stock option corrects the manager's shortsighted behaviour, reduces the agency costs, boosts the cash-flow of the company and strengthens the confidence of the investors. However, the U.S. financial scandals of Public listed companies, and the bankruptcy of Enron to make people question the effectiveness of the incentive system. The internal defects of executive stock option incentive system is exposed. Whether to reform and keep the system or to discard it has yet to be discussed.In this paper, empirical analysis is used to exam the enterprise performance of listed companies in China after they implemented ESO .The result is that ESO have incentive effect to some extent , but the effect is not significant, which is caused by both the internal and external fators.The internal defects of ESO incentive system is the internal causes that ESO can't help the listed companies do better than before as we expected. As a gift the risks and benefits of ESO are asymmetric; Stock prices can not truly reflect the performance of the companies; To regard stock prices as a performance evaluation standards boost managers to prop up share prices by financial fraud and is difficult to differentiate the degree of efforts of the managers who are encouraged by stock options; Stock options only have incentives for risk lovers; ESO may not be able to help shareholders to maximize their benefits; ESO is only effective for growing Enterprise; ESO may widen the income gap.The lack of a good environment of ESO in China is the external causes. The flawed governance structures, unreasonable assessment indicators, immaturity of the market, inadequate laws and regulations are all obstacles to implement the executive stock option incentive.This paper proposes measures and suggestions to improve ESO incentive mechanism. In addition to ameliorating company governance structures and speeding up the construction of market system, we should select a of scientific and reasonable performance evaluation indicators , combine the financial indicators and the non-financial indicators, revise laws and regulations such as tax policy and financial assistance policy to support ESO incentive mechanism; Eliminate the inherent deficiencies of stock option plan with the following solutions: introducing the premium,corresponding the risks and benefits, determining the amount of stock options granted by the amount of the transaction amount, introducing indexed exercise price and designing stock option plans carefully.