Indexed executive stock option (ESO) includes both higher price incentive effect and higher volatility incentive effect than the traditional ESO, which will drive managers to enhance the price of stock and the volatility of stock. Therefore, the researcher of this paper designed a new penalty function based on the indexed ESO proposed by Johnson and Tian in 2000 for the sake of protecting higher price incentive effect from being damaged by higher volatility incentive effect of ESO. The new penalty function will increase the level of penalty when in bullish market, which will keep price incentive effect that is high and will decrease high volatility incentive effect. In other words, it do not change higher delta whereas make high vega become lower. For this reason, it would reduce agency cost between the stock holder and the manager.