The executive stock options indexed to the market are useful as a compensation scheme in that the indexed options protect shareholders from rewarding executives excessively during market upturns. Despite the usefulness of indexed options, most of the large ?rms in the US have not granted an indexed option. According to academic researches on executive stock options, the probability of expiring in the money is too small to offer risk- averse executives incentives to work more e±ciently. This paper develops a new indexed option model and explores the incentive effects. While there is a similar indexation feature between the existing indexed options and the new one, a different payoff structure has a significant influence on option values and incentive effects. We show that the new indexed option has the higher probabilities of expiring in the money and increases incentive effects relative to the existing one.