Executive Stock Options And Their Applicability In China

As an incentive mechanism, executive stock options (ESO) authorizes senior managers the rights to buy common stocks which their company issues at a given price and the rights to sell them after a promissory time in stock market. In modern enterprises, agency problems emerge in quantity when the roles of stockholders who supply the material capital and entrepreneurs who supply the human capital are not playing by the same individuals any more. Because of the different interests and the information asymmetry between stockholders and entrepreneurs, it is necessary for stockholders to set up a system to stimulate and restrict the agent, that is, the entrepreneurs. Based on agent theory and property rights theory of human capital, ESO claims its own necessities because traditional rewards system cannot meet the needs of stimulation in the long run. And ESO proves its efficiency, both in theory and in practice.After presenting itself firstly in 1952 in America, ESO has been practiced successfully in many countries. In recent years, Chinese have used ESO gradually in their enterprises to replace the traditional rewards system that has lost its subsistence foundations. We can use the success experiences of America and other countries as reference in setting our own ESO project.In China, state government owns most of enterprises, and there are more problems in its agency system than those of other kinds of enterprises'. In order to form long-playing incentive system, it's urgent to introduce ESO into Chinese enterprises. However, Chinese enterprises are facing too many restrictions on institution arrangement to put ESO into effect. So it is reasonable for us to put ESO into effect on a large scale only when most of the restrictions are not exist any more. And before this comes true, ESO should be first tried out in selected enterprises. There are two modes of ESO to select, the normative ESO mode and the phantom ESO mode. The listed companies can select the former, and the other companies can select the latter. In order to have greater incentive effect, we should set more particular project of ESO to fit our Chinese enterprises.