Studies Of Executive Stock Option On EVA Theory

The traditional ESO plans the company using have the defect as follows: themanagers may manipulate stock price as much as possible in order to earn return onequity, so it damages the interest of the company; accounting information can notreflect the actual value of the company under the control of the managers, resulting indistortion of accounting information; It is not incentive effectively because oftraditional ESO awarding only not punishing; the traditional ESO does not considerthe cost of capital invested by the shareholders.The essence of the EVA theory is that the net profit deducting the cost of debtcapital and equity capital, creating profits for the enterprise, the net value added forshareholders’ wealth. It overcomes the defect of considering loan capital only butequity capital in traditional accounting profit.In this paper, we introduce the ESO model based on EVA to solve the problemsof the traditional ESO plan. The basic idea of this model is that putting the EVAtheory into ESO. This article is divided into five parts to elaborate ESO plan based onEVA theory. The Introduction elaborates the background and significance of the topic,main content and innovation. The second part is the ESO theory, explaining thedefinition of ESO, the implementation process, ESO mechanism and the basic theoryof the ESO. The basic theory of the ESO Includes the principal-agent theory, humancapital theory, motivation theory, innovation and risk of investment theory, and itconcludes that the existing problem used in practice. The third part elaborates theEVA theory, the definition of EVA, accounting adjustments and formula of the valueof the EVA, and the way of improving EVA. The fourth part is to build the ESOmodel based on EVA theory. The main contents of this part is elaborating thedefinition of this model, and then determining the basic elements of the model,including the identification of the grant range, determining stock price, putting thismodel into realization, the management of this model. Re-established grant number and exercise price of the equity incentive plan by calculating the value of EVA thisyear and last year, it can avoid the defects of the company exercise price based onmarket price and solve the problem of managers’ manipulation of stock prices. Inequity incentive plan based on EVA, the company exercise price was determinedbased on own situation in the grant period. It changes according to the value of EVAthis year and changes between these two years in the waiting period. The annual grantnumber changes also like exercise price. It can solve the problem of awardingmanagers only but punishing. Managers aim to maximizing the value of the company,taking account to the equity capital effectively to create the value for shareholders. Atlast, the paper describes the advantage and defects of ESO based on EVA. The fifthpart analyses the model of the ESO based on EVA. This paper takes ZTE as anexample to illuminate the phenomena of using this model, at the same time it depictsthe result after using the model. In the other hand, I give my advice about applyingthe applicability of EVA, including consummating the rule of law, monitoring of thecapital markets further. In the last, I introduce the concept of EVA measures; fromredefine the goal of company to penetrate from superior to subordinate gradually.