Equity compensation is an efficient and convenient way to deal with agency problems and reduce agency costs. Equity compensation is very important to a firm and plays an essential role in the future development of the firm. Equity compensation was first born in the United States in the 1950s, China's equity compensation developed late, and China's first equity compensation program occurred at the end of the 20th century. In order to examine the effect of equity compensation on firms, this paper uses a merged dataset of 8,243 firm-year observations from the China Stock Market and Accounting Research Database (CSMAR) for 1,780 firms, listed in Shanghai and Shenzhen stock exchanges in China, from 2002 to 2020. Then, through two aspects of financial performance and market returns, we discuss the effects on firm efficiency, profitability and market returns in three dimensions: stock option grant, level, and value. The results show that no matter from which dimension, equity compensation has positive effects on firm efficiency, profitability and market returns. This fully shows that equity compensation is very suitable for Chinese firms and promotes the development of firms.