The papers of stock-based employee compensation have increased dramatically in recent years, focusing attention on whether stock-based employee compensation can enhance employees¡¦ motivation or impact firm value. A number of recent papers have addressed conflicting evidence as to whether stock-based employee compensation enhance the performance of the firm. Some relatively new studies used use the Ohlson (1995,1999) and Feltham ¡® Ohlson (1999) models to investigate the market¡¦s perception of the economic effect of employee stock options on firm value(Aboody et al.2001; Bell et al., 2002). However, critics have questioned the validity of such studies (For a review of related studies, see Beaver 2002). In fact, stock-based employee compensation can influence firm value through improving performance of firm, and at the same time by diluting the shares of outstanding stocks, thus harms shareholder equity. This study was primarily designed to examine how stock-based employee compensation affects shareholder equity through Incentive and dilute effects. Stock-based employee compensation in this study comprises employee stock bonuses and employee stock options. First, the Incentive and dilute effects are combined in Ohlson model. The hypothesized relationships of constructs, observed variables and operational definitions are defined. The empirical work will be conducted by LISREL method to estimate the coefficients in the model. The estimated results will be dressed the following points. 1.Whether the stock-based employee compensation affects equity valuation. 2.Whether the stock-based employee compensation affects that the intrinsic value through improving abnormal earning? 3.Whether the stock-based employee compensation harms shareholder equity by diluting the shares of outstanding stocks? 4.Discuss employee stock bonuses and employee stock options respectively. In this study, we find the stock-based employee compensation is relevant to the equity value. Employee stock bonuses are relevant to shareholder equity and abnormal earning. In other words, employee stock bonuses have directly incentive effects. Otherwise, employee stock bonuses also have dilute effects. However, the dilute effects are smaller than the incentive effects. On the other hand, employee stock options aren¡¦t relevant to shareholder equity and abnormal earning. Otherwise, employee stock options don¡¦t have direct dilute effects in grant year.