The Research On Equity Incentive Mechanism

Corporate governance practices and modern corporation theories in western countries have proved that equity incentive, as an important corporate governance mechanism, can effectively solve the agency incentive problem and achieve the goal of long-term incentive. In China, accompanying with the recovery and development of new China capital market, the implementation of equity incentive has experienced four climaxes. The first three climaxes were primarily implemented by state-owned enterprises (SOEs) but ended in failure or suspense. Afterwards, along with the development of Growth Enterprise Market and New Third Board (an over-the-counter market for growth enterprises in China) the fourth climax is primarily promoted by the private enterprises and is definitely in the ascendant. The above phenomenon makes the author confused continuously in his investment banking working experience. What he concerns is that why the implementation of equity incentive accomplished respectively by SOEs and private enterprises lead to different endings? To be more specifically, comparing to the satisfying experience of private corporations, why the implementation of equity incentive in SOEs do not result in successful improvements and are usually hard to carry on? What’s the reason? What’s the internal logic of equity incentive? What’s the special internal law of practicing equity incentive in China? All these questions need to be answered.In order to answer the questions, the author makes a comparative analysis on the differences between the market economy of western countries and the national conditions of China (e.g. political, economic and cultural factors). After analyzing the cases of equity incentive practices in China, the author summarizes operational mechanism and the inherent limitations of this approach. Finally, the author applies the above research results to carry out a comparative analysis on the distinctions between the positioning, development process and the realities of SOEs and private enterprises.All of above are demonstrated by8chapters, and the chapters3-7are the core parts. The chapter1is the introduction of the research questions and innovation points. In chapter2the main therories concerning equity incentive are reviewed as the theoretical basis of the research. In chapter3the author tries to analyze the mechanism of equity incentive and set up a theoretical framework for further research. And in Chapter4, the author mainly researches the structure of equity incentive contract and suggests the contracts should consist of3aspects and9key factors. After that, in chapter5, the author draws the conclusion that the private corporations in China are more necessary and willing to implement equity incentive smoothly than SOEs by comparing their development histories and present situations. Then in chapter6, the author analyses the institutional environment inside and outside corporations and advises the direction of optimization, which includes political, economic and cultural aspects. Finally in chapter7, the author points out equity incentive has inherent limitation because of its material and market basis. In order to make equity incentive root in China, optimization and innovation are required in accordance with Chinese national conditions.The author believes that equity incentive contract makes three independent markets (capital, products and human resource) combine as an organic whole, furthermore the basic functions of market mechanism can directly influence the corporation operation through the managements.Equity incentive can influence the corporation value and corporate governance through two levels of resources allocation. First on the one hand the efficient capital market can dynamically supply the shareholders (as principals) and the managers (as agents) with the information of resource allocation, on the other hand the capital market can reversely supply the information of the managers’ performance evaluation by the stocks and options price fluctuation. For that, the managers would actively optimize the efficiency of resource allocation due to their increased sensitivity to the information supplied by the stock price. Second at the level of corporate governance, the equity incentive can redesign the quantity and structure of manager remuneration by endowing them with the proper allocation of the residual rights of corporation. In summary equity incentive should integrate the market function of information delivery and supervision in three markets and improve the corporation value through the reduction of information asymmetry and optimization of corporate governance.The author suggests the following aspects should be focused on during the practice of equity incentive in today China:The contract design is the key procedure to ensure the effectiveness of equity incentive. Above all, the contract must be elaborately designed fully connected with the characters of the specific corporation within the framework of current laws and regulations. In addition, the contract should be designed in considering the influence of accounting and taxation policy. Finally, the well-implemented equity incentive necessitates the comprehensive and effective internal governance mechanism.In China, SOEs possess the monopoly advantage on natural and human resources and market due to their unique histories and special function. At the same time they also maintain multi-purposes and management dual positions and are lack of sound evaluation system, all of the above factors make equity incentive impossible to implement, especially under the circumstance of a widening wealth gap between rich and poor. On the contrary, private corporations in China have lower social status and weaker ability in attaining resource, thus less effective means to attract human resources. Therefore the implementation of equity incentive is their realistic and necessary choice. Besides they are more willing and able to implement equity incentive smoothly because of their no worry about the loss-of-state-own-assets, as well as less supervision and constraint from laws and policies.The implementation of equity incentive requires the coordination of the institutional environment inside and outside the corporation. Moreover both the sound and effective corporate governance and the institutional environment, which includes political, economic and cultural field, are the fundamental and important guarantee. The author demonstrates the SOEs reforms lag relatively behind the requirements of reforms in economical fields is the main reason many reforms in economical fields are difficult to push forward in China. Finally equity incentive has inherent limitation because of its material and market basis. In order to make equity incentive root in China, optimization and innovation are required in accordance with Chinese national conditions.