---
title: "Equity Incentives: Making Employees Work for Themselves!"
description: "Equity incentives are also a 'maker' of excellent talent, motivating employees to go from ordinary to excellent, and from excellent to even better. Employees with ideas don't need to start their own businesses; by continuously striving and becoming valuable talent to the enterprise, they can board the ship of the enterprise they serve, become shareholders, grow with the company, share in its development achievements, and achieve their career and wealth goals."
author: "章晓洪"
publisher: "New Distribution"
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published: "2016-07-31"
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# Equity Incentives: Making Employees Work for Themselves!

> Equity incentives are also a 'maker' of excellent talent, motivating employees to go from ordinary to excellent, and from excellent to even better. Employees with ideas don't need to start their own businesses; by continuously striving and becoming valuable talent to the enterprise, they can board the ship of the enterprise they serve, become shareholders, grow with the company, share in its development achievements, and achieve their career and wealth goals.

Equity incentives are also a 'maker' of excellent talent, motivating employees to go from ordinary to excellent, and from excellent to even better. Employees with ideas don't need to start their own businesses; by continuously striving and becoming valuable talent to the enterprise, they can board the ship of the enterprise they serve, become shareholders, grow with the company, share in its development achievements, and achieve their career and wealth goals.
Competition in modern enterprises is competition for talent, and talent is the core factor of enterprise competitiveness. The era when private entrepreneurs relied on doing everything themselves to grow their businesses is over. Even if some entrepreneurs could do it, in the long run, not only would they pay a heavy health price, but the enterprise would not go far. To survive, develop, and grow, enterprises need a large number of talents who can give them strong competitiveness, and they constantly face the challenge of cultivating and attracting talent. Equity incentives are a very effective means for enterprises to solve talent problems. Many private enterprises, especially listed or to-be-listed companies, use equity incentives like a 'golden handcuff' to 'cuff' the talent they need. During my IPO services for enterprises, I have designed equity incentive plans for many companies, all with good results.
Equity incentives are a method that grants operators certain economic rights by allowing them to obtain company shares, enabling them to participate in corporate decisions as shareholders, share profits, and bear risks, thereby serving the company's long-term development diligently. Here, operators generally refer to senior executives, technical backbone, and other talents crucial to the company's development, who are the targets of equity incentives. The main legal basis for equity incentives is the Company Law and the Securities Law.
**The significance of equity incentives is mainly reflected in the following aspects:**
First, they incentivize talent and help reduce agency costs. The separation of ownership and management leads to a principal-agent relationship between shareholders and operators. Agency costs arising from agency problems include the principal's monitoring expenses, the agent's bonding expenses, and residual loss. Equity incentives make operators shareholders or motivate them to become shareholders, blending ownership and management to some extent, alleviating agency problems, reducing the principal's monitoring expenses and residual loss, and reducing agency costs. They encourage operators to consciously use their talents and serve the enterprise's development to the best of their ability. In operations, they pay more attention to long-term development goals and reduce short-sighted behavior.
Second, they retain talent. Equity incentives often require the incentive target to serve a certain number of years before obtaining the corresponding shares. Even after obtaining shares, there are restrictions on sale, and the company may even set conditions for repurchase. Therefore, equity incentives are also a very effective method for retaining talent.
Third, they can improve company performance. Although equity incentives focus on motivation, such incentives are usually conditional. The incentive target must meet certain performance indicators to obtain the corresponding shares, thereby improving company performance through equity incentives.
Additionally, equity incentives can attract external talent and reduce operating costs. External talent is attracted by the company's equity incentive method and is willing to serve the company to realize their value and economic returns, creating a positive cycle and enhancing company cohesion. Using high salaries and bonuses to attract and retain talent often puts pressure on operating costs and cash flow. With equity incentives, companies can avoid such concerns.
Companies with equity incentives are more likely to gain investor favor because investors pay great attention to the team when investing. A team composed of excellent talent gives investors more confidence. Of course, equity incentives can also improve corporate governance structure, enhance management efficiency, and market competitiveness.
Equity incentives are also a 'maker' of excellent talent, motivating employees to go from ordinary to excellent, and from excellent to even better. Employees with ideas don't need to start their own businesses; by continuously striving and becoming valuable talent to the enterprise, they can board the ship of the enterprise they serve, become shareholders, grow with the company, share in its development achievements, and achieve their career and wealth goals.
**Main Models of Equity Incentives**
1. Performance Shares: This refers to setting a relatively reasonable performance target at the beginning of the year. If the incentive target achieves the predetermined goal by the end of the year, the company grants them a certain number of shares or extracts a certain reward fund to purchase company shares. The liquidity and realization of performance shares are usually subject to time and quantity restrictions.
2. Stock Options: This refers to the company granting the incentive target a right to purchase a certain number of the company's circulating shares at a predetermined price within a specified period, or to abandon this right. The exercise of stock options also has time and quantity restrictions, and the incentive target must pay cash for the exercise. Currently, virtual stock options used in some listed companies in China are a combination of virtual stocks and stock options, where the company grants the incentive target a virtual stock subscription right, and after exercise, the incentive target receives virtual stocks.
3. Virtual Stocks: This refers to the company granting the incentive target a virtual stock, allowing them to enjoy a certain amount of dividend rights and stock price appreciation income, but without ownership, voting rights, or the ability to transfer or sell. They automatically become invalid when leaving the enterprise.
4. Stock Appreciation Rights: This refers to the company granting the incentive target a right. If the company's stock price rises, the incentive target can obtain a corresponding amount of stock price appreciation income through exercise. The incentive target does not need to pay cash for the exercise and receives cash or equivalent company shares after exercise.
5. Restricted Stocks: This refers to granting the incentive target a certain number of company shares in advance, but with special restrictions on the source and sale of the shares. Generally, only after the incentive target completes specific goals (such as turning losses into profits) can they sell the restricted stocks and benefit from them.
6. Deferred Payment: This refers to the company designing a package of compensation income plans for the incentive target, part of which is equity incentive income. This income is not paid in the current year but is converted into a number of shares based on the fair market price of the company's stock. After a certain period, it is paid to the incentive target in the form of company shares or cash based on the then-current stock market value.
7. Operator/Employee Stock Ownership: This refers to allowing the incentive target to hold a certain number of the company's shares, which may be given free of charge, subsidized by the company, or purchased by the incentive target themselves. The incentive target benefits when the stock appreciates and suffers losses when it depreciates.
8. Management/Employee Buyout: This refers to the company's management or all employees using leveraged financing to purchase the company's shares, becoming shareholders, sharing risks and benefits with other shareholders, thereby changing the company's equity structure, control structure, and asset structure, and achieving shareholding operation.
9. Book Value Appreciation Rights: This is divided into purchase type and virtual type. The purchase type means the incentive target actually purchases a certain number of company shares at the net asset value per share at the beginning of the period, and sells them back to the company at the net asset value per share at the end of the period. The virtual type means the incentive target does not need to invest funds at the beginning; the company grants the incentive target a certain number of nominal shares, and at the end of the period, the incentive target's income is calculated based on the increase in net asset value per share and the number of nominal shares, and the company pays cash accordingly.
**Main Factors to Consider in Equity Incentives**
1. Incentive Targets: This includes equity incentives for business operators (such as CEOs) and employee stock ownership plans for ordinary employees. The usual key targets are: directors, senior management, technical backbone, and sales backbone who have an important impact on the company's development.
2. Incentive Models: Among the nine incentive models mentioned above, non-listed enterprises usually use models such as stock options, employee stock ownership plans, and virtual stocks (shares). Listed companies usually use stock options, performance shares, deferred payment, etc. Restricted stocks are mainly suitable for listed companies with poor performance or start-up companies. Management buyouts are usually suitable for enterprises with state capital exit, collective enterprises, and enterprises during anti-takeover periods.
3. Incentive Quantity: The total number of shares granted to the incentive targets, and the number of shares granted to individual incentive targets.
4. Incentive Price: Determine the exercise price of the incentive shares.
5. Incentive Time: Determine the various times for equity incentives, such as the grant date, validity period, waiting period, exercisable date, and lock-up period.
6. Incentive Source: The source of shares and the source of funds for purchasing shares.
7. Incentive Conditions: The conditions under which the incentive target can exercise rights, and the loss or change of rights.
Enterprises can design different equity incentive plans based on different purposes and requirements. Equity incentives are a very serious matter for enterprises. If the equity incentive plan is designed unreasonably, it may not only fail to achieve the desired effect but also dampen the enthusiasm of some people. Therefore, it is particularly important to hire an experienced professional legal team to help design the equity incentive plan, which can achieve twice the result with half the effort.
With the gradual improvement of China's multi-level capital market, more and more enterprises will enter various levels of the capital market, and more and more enterprises will use 'equity incentives' as an effective 'golden handcuff'. When wealth is distributed, people gather; when senior executives and backbone employees have good economic returns, the enterprise can stabilize its talent team. Wealth is a byproduct of ability. Since talent has demonstrated their ability, the enterprise should give them this reasonable byproduct; otherwise, they may feel frustrated and even lose the motivation to continue using their talents. Therefore, once virtuous and capable talent appears, major shareholders must not be stingy in giving incentives. Only by stimulating their motivation can the enterprise gain greater benefits. When the enterprise forms a virtuous cycle, the biggest beneficiary is the major shareholder.
Text/Zhang Xiaohong Source: China Economic News Network
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