A Study Of Executive Stock Option Incentive And Its Mechanism Of Assurance

The 21st century is a knowledge economy era. Human capital is playing a role inthe world. How to inspirit senior managers is the key of building the core competenceof the firm. Executive stock option as one of long-term incentive instruments is thefirst best incentive contract. ESO can effectively encourage managers taking morerisk, make the agency cost down and maximize the utility of both managers andshareholders. However, in the post-Enron era, people are more and more concerningabout the side-effects of ESO. Beginning with a review of the theories of the firm,human capital, efficient markets hypothesis, corporate governance and incentive andthe related papers, this paper made a present of the ESO's practice in the world,discussed about the stimulation mechanism of ESO, and eventually concluded amechanism of assurance of ESO which could not only develop the advantage butavoid the side-effects of ESO. The mechanism of assurance of ESO includes sevenelements: efficient capital market, corporate governance, manager market,independent audit, total compensation system, and regulations on accounting andtaxation and so on. In the last chapter, this paper made an analysis of the current statusof the mechanism in China, and proposed some macro and micro advice on how topractice ESO in China's corporate.