Stock Option Incentive Mechanism

A remarkable characteristic of the modern enterprises is that theownership separates from the power of management, therefore principal-agentcontradiction occurs. Executive Stock Option (short as ESO) plan, as along-term motivating mechanism, originated from the USA, and now hasextended to many countries in the world owing to its remarkable role inmotivating and restraining the corporate managers. From the 1990's, some ofthe Chinese enterprises began to try out ESO plan, however, the ESO plan didnot give full play to its motivating function, and in general, the ESO had notbeen implemented in a standard way, naturally, the anticipated results haven'tbeen achieved yet.Based on the Principal-agent theory, theory of Enterprise IncompleteContract, theory of Human Resource and theory of the Right of Surplus Claim,this dissertation discusses the theoretical bases of ESO in the aspects ofeconomics and corporate management, which shows it's quite natural andcertain that the ESO has constituted an important part of the modernmotivating theory. Then the article lists the positive and negative effects thatoccurs during the implementation of the ESO plan and also analyzes thenecessity and feasibility of implementing ESO plan in China. In the last partof the article, as a series of newly-amended laws have been promulgated andthe legal obstacles have been removed, the ESO plan has been designed in astandard way, meanwhile, in view of the existing problems in theimplementation of the ESO, some suggestions are given out in order that theincentive ESO plan will be carried out correctly and effectively in the future.This article holds the idea that with the improvement of the legislation,the increasing maturity of our capital market, the constant perfection of thecorporate governance and our more understanding of the ESO system, theESO plan will bring more and more benefits to our corporate reform and thelong-term motivation to the managers.