Study Of Stock Option Incentive Mechanism Based On EVA

A reasonable scientific performance evaluation system is the base of Executive Stock Options plan. The traditional ESO plans give managers the chance to control the stock price for individual benefit because of the poor performance evaluation system. The financial scandals such as Enron and MCI WorldCom in America appear the importance of selecting performance evaluation indexes constructing operator incentive mechanism. These conventional indexes do not consider the cost of capital but only use the format of interest expense to reflect debts financial costs and neglect the cost of stock ownership capital as well. In addition, these indexes are likely to lead to the short term profit pursuing among higher class managers and even the flood of fake indexes.EVA is a quite good choice to solve the problems mentioned above. EVA is the real economic profit which equals net profit after tax minus all assets cost including stock ownership and debts. Additionally, EVA brings forward a higher request to manager, that is to say, being responsible for the efficient use of capital and the expected income of capital so as to improve the efficiency of capital collocation, promote manager to increase the profit level and the efficiency of capital. EVA is a performance evaluation system which cares not only past but also the future. It can lead the value activity of corporate operation.In this paper, EVA is introduced to performance evaluation system in design Executive Stock Options plan. By constructing multidimensional performance evaluation system based on the EVA, we can make the core essential factors of stock option plan: the option quantitative distribution and dynamic exertion price is closely bound up with EVA, thus evading the operator morals hazard effectively. In the new Executive Stock Options plan based on EVA system, we can not only determine the quantity of stock options for every manager, but also adjust the quantity of stock options for certain managers according the EVA they create. The exertion price of the new Executive Stock Options plan based on EVA system is dynamic which can be calculated by the difference between the rate of EVA and dividend, excluding the elements which managers could not control.