The separation of ownership and control right is the major characteristic of themodern enterprise. Partners(principals) own ownership of corporation andoperators(agents) own control rights. The disagreement on the aim between partners andoperators results in the problem of principal-agent. For principals, how to design a set ofincentive-constraint system which makes agents achieve the max profit of the enterpriseand get the max individual benefit is a practical problem the realms of economics andmanagement devote to settling since the establishment of the modern enterprise system,it is also a problem that has not been solved satisfactorily yet.Chinese enterprises has gone through many incentive measures such as contractsystem, charter system, mortagage assets, and annual salary system. These measureshave obvious effects in short-term, but it cannot solve the long-term incentive questionof the enterprise. In the course of the transformation from planned economy to marketeconomy, facing to the pressure of the enterprise’s reform, this question becomes moreurgent.Executive Stock Options(ESO), as an innovation of the distribution system, firststem from the Employee Stock Ownership Plan(ESPO) in Amercia in 1920s. Itsemergence and development are closely related with the change of the Amerciancorporations’ corporate governance, increase threat to enterprises brought by the flow ofadvanced talents, and large-scale condense and annexation in the enterprises. It is mainused to make up the deficiency in traditional salary systems, and solve the long-termincentive problem of the operators. The first enterprise to apply ESO in China isChenzhen Wanke. In 1993, in order to standardize ESOP, Wanke invited special lawyersin Hongkong to set down normative Employee Stock Ownership Plan Rule. Now,governments in the Shanghai, Beijing, and Wuhan have organized to carry out ESO,whose concrete schemes are different.On the whole, there are two kinds of opinions about the effect of ESO amongforeign economists. One is that managers’ salary has less relation with the corporations’profits. ESO not only can not offer enough incentive, but can bring negative influence tocorporations and society. The other is that managers’ salary is closely related with thecorporations’ profits. If the suitable scheme, ESO is the best long-term incentive meansat present.Owing to the puzzlement and interest in it, this thesis through the theoreticalanalysis of ESO incentive system, adopts the ways of combining the positive analysisand normative analysis, takes the problem to be settled as the precursor and discussesthe possibility to implement this incentive method in our country as well as the realistic f1tsignificance to solve this problem. On the basis of theory, it emphasizes its actufaloperationality. Ih view of the current situation on our country designs the implementingscheme of the system in detail and puts fOrward the concrete methods and collllermeasures to the barrier in the course of the implemefltation.The thesis is divided into 4 parts:Ped 1 analyzes the problems in the incentive scheme in the China’s ellterprises. Inthe broad sense, the incentive has become the fOcus of economics, impenetrating theproduction, distribution, and consumption of wealth. In the nariow sense, it only meansthe operators’ incentive in modem enterprises.This thesis studies the latter. Through the’analysis of the incentive problems, the conclusion has been drawn that enterprises inChina have improved greatly in short-term incentive, bllt long-term incentive has notbeen settled.Part 2 is the theoretical and functional analysis of ESO. It firstly introduces theconception of ESO and its emergence and development.Then, on the basis of analysinghuman caPital theory and principal-agent theory, it explains and extends Holmstrom’sand Milgrom’s mOdel. The difficulty in the design of pay contract lies in theaPpraisement of the enterPrise’