In May 1997, the Japanese Commercial Code was amended to allow firms to begin granting stock options as compensation to top management and employees. Nearly 350 firms adopted option-based compensation plans between 1997 and 2001. These options typically have five-year lives and are out-of-the-money by about 5% at the grant date. Firms exhibit abnormal stock returns of about 2% around the announcements of plan adoptions. We find improvements in operating performance and observe that dividend policy and volatility remain unchanged post-adoption. Our evidence suggests that well-designed incentive compensation plans are consistent with the creation of shareholder value.