Executive stock options have become an ever more important component of a manager's compensation. This paper compares three compensation contracts that will be the best design under strong and weak governance structures. We address how various mixtures of the components of a compensation package and the characteristics of the options affect the investment risk policy. Relative to the risk level that maximizes firm value, an option contract can induce too much or too little corporate risk-taking, depending on managerial risk aversion, the underlying investment technology and the governance structure. The results in our simulation reveal close relationship among investment risk, severance packages and governance structure. Managers will consider both wealth effect and entrenchment effect when they make investment decisions. We find there is trade-off relationship between severance packages and governance structure when the objective is to minimize the total cost to the firm. We suggest company to adopt strong governance structure when managers are motivated with bonus scheme, and weak governance structure when the managers are motivated with option-like severance packages; otherwise managers will be induced to entrench himself and to destroy the company value.