Exploration Of Executive Stock Options System Reflect On China's Equity Incentive Mode

Executive stock option is one of the most popular types of incentives used by US companies after the late 1980s. There are various reasons firms grant ESO (Executives Stock Option): The payoff structure of ESO ties the wealth of top managers to shareholders'wealth, thus ESO compensation is expected to reduce the interest conflicts between shareholders and top managers and solve the agency problem; ESO is the most efficient way to attract, retain and motivate top managers, a third reason for granting stock options is cash conservation.ESO is currently the focus of a hotly international debate immediately following the accounting scandals of big American companies. ESO incentive has many negative effects, the incentives of ESO force top managers to manipulate reported performance and thus has been used abused. What's wrong with ESO? This article concluded that ESO is one of the best equity based incentive, the problems are: the accounting treatment of ESO, the internal and external governance of ESO, the designing of ESO. ESO can still serve as a"Golden Handcuffs"for companies (especial for Hi-tech companies and emerging companies) after been improved.Can ESO been used as an incentive for Chinese companies now? After studying the internal and external environments for implementing ESO, this article concluded that before China improves its financial market regulation and enforcement, it would be unwise to promote ESO for Chinese companies.After studying several cases of Chinese companies that used equity based incentives, this article concluded incentives such as SARS that related to the stock price is not suitably for China now. Chinese companies can use Share Based Option and Future Shares as incentives now. Finally this article derived two simple models for this two compensation plans.