After reform of state -owned firms mechanism, many companies appeal for ESO, but there have not been any clear theories for operation in practice until now. On the basis of principal-agent theory of the firm, this paper regards owners and managers as the two sides to game and builds the game model which analyses the behaviors of owners and managers. As a long-term stock based incentive system, ESO will align the goal of owners and managers and make them reach Nash Equilibrium to maximize their utility, and lower agency cost to solve the agency problem in modern firms.