Study On Stock Option Incentives Of Public-traded Companies In China

Stock Option Incentive made its debut in earlier1950s in USA and became popular in1970s across the West and then all over the world in1990s, as a solution of interests conflicts imbedded in the agency by agreement. It aims to align the interests of corporate management and the company owners and to motivate the management to focus on long term growth of the company and reduce short-signed business conducts.Legislation regarding stock option in China came into place as late as in the end of2005.Though a big number of companies have issued stock options plans, regulations governing stock option incentive are far from complete and mature. In practice, there are divided opinions on whether stock option incentive is golden cuff or gold watch. There have been many studies on stock option incentives, but most of them are on the correlation between stock ownership and company performance, ignoring the opportunistic behavior of the corporate management.This essay makes comparison among and analysis into various stock option practices in China and overseas and builds a econometric analysis model to monitor opportunism of the management, which provides theoretical as well as pragmatic guidance to governance of the stock option practices in China.Studying on the differences between the business environments and legal systems of China and the West, it is found that the development of stock option incentive depends much on government support. In the progress of stock option practices in UK and US, the US government made stock option tax free and the UK government offered big tax reduction benefits on the earnings from stock option exercises if approved by tax authorities. As such, tax benefit and tax policy has guided the direction of stock option practices.As in China, only after the regulations regarding stock options were put into place, stock option practices in listed companies developed orderly. For further advancement of stock option incentive, tax, fare, information disclosure policies must be ready. At this moment, China needs to learn from international experiences and makes breath-through in tax policies.Researching on the stock option plans posted during the period from2006January1st to2011December31st and using SAS data analysis system, risk monitoring model and BASU (1997) Model, it is found that opportunistic behaviors of corporate management do exist, i.e. taking advantage of data disclosure, P&L manipulation to influence company performance statement and stock prices and so as to benefit the management. Moreover, problems are found with stock option decision-making, grantees, exercise price, number of options, qualifications for exercise, due to over interference of governing authorities and also defects of the stock options plans.The objective of the stock option plans is to motivate the management to work hard to and effective surveillance of the management’s business conducts is precondition for such motivation effect. However, the interests of the company owners and those of the company management are different and the company management has much better access to business information. Therefore, enforcing internal and external surveillance and discipline and prevention of the negative effect of stock option incentives, is instrument to development of regulations on stock options.Studying65stock option plans posted between2006January1st and2011December31st, of the e stated owned public companies, it is found that many executives were assigned by governmental bodies, more based on political criteria, instead of on the candidates’management competency, which is contradictory to the aim of stock option. And the agency agreement of stated owned public companies is multileveled and stock option is only the last incentive step, but the motivation of the multilevel agents is ignored. Therefore, we need to build up a scheme that can motivate multilevel agents and thus up lever can monitor lower level effectively and every level can be motivated effectively to resolve the low motivation of each level and improve the efficiency of the agency chain.Studying on the286stock option plans posted between2006January1st and2011December31st, it is found that the agency agreement of non stated companies is simple and the main issue is the potential interests conflicts between major owners and minor owners. On the other hand, non stated owned companies mainly are in the labor intensive and highly competitive businesses and stock options are of high necessity to make up for their disadvantage in talent attraction and retention. On one hand, governmental interference should be reduced to offer the management more decision power; on the other hand, solid protection of minor owners’interests is needed to avoid damaging of minor owners’interests resulting from ownership dilution and manipulation of P&L and stock price.Finally, this essay summarizes the conclusions of the research and based on thorough analysis of the realities and issues of stock option plans of public companies in China and deep thoughtful insight into experiences and lessons of the stock option progress worldwide, a number of proposals are put forth on how to advance stock option practices in China.