Equity Incentive, Restraint Mechanism And Corporate Performance Growth

In modern corporate structure, the ownership and management is separated, thus some methods is needed to incent the managers to work for the long-term development of the enterprise value, and equity incentive system is one of those methods. Equity incentive mechanism provides the managers or the core technical personnel with shares or share-based earnings in different ways, so they are encouraged to make decision, share profit and take risk as a shareholder. This thesis focuses on the practice and problems of equity incentive adoption in china listed companiesFirstly, Theme choosing and research ideas.The foreign practice as well as the modern firm theory has proven the efficiency of equity incentive in improving corporate governance and reducing agency costs. It's in the 1990s that china listed companies began to introduce Equity incentive theory. However its development had always been slow. At the end of 2005, China "split-share structure reform" was coming to the end and the Securities Regulatory Commission enacted "The Measures Governing Equity Incentive Plans of Listed Companies (For Trial Implementation)", which means the real start of share incentive scheme. Since then many listed companies have announced to adopt the plan. By now there has been a great advance on china share incentive practicing. But in the near years, the application of this theory has turned out a number of issues, such as the scheme design was not very scientific. What's more, the legal system wasn't satisfying, etc. To deal with this status, many government departments, including the Securities Regulatory Commission and the SASAC (The State-owned Assets Supervision and Administration Commission of the State Council), have strengthened the standardization on using of equity-based incentive. As a result, the adoption of equity incentive plans has gone through a period from highly sought after to a rational level in china.This paper argues that there are two key problems in China's equity-based incentives. On the one hand, relevant restraint mechanisms are not given enough emphasis, so the design of many incentive programs tends to be rewarding and the incentive target persons can easily get income without rational bindings, and the other, the general level of corporate governance in China is not very ideal and the equity-based incentive-related legal system is still in the developing phase. Both the two factors make the implementation of equity-based incentive less controlled and regulated, and eventually being evolved into a violation of the company's interests. Beginning with the debate on the use of share incentive plan, the thesis will try to probe into the following question:does share incentive have a substantial role in promoting the company performance, what kinds of incentive-related terms and supervision is necessary, and how they work.Based on the above considerations, the research samples are the listed companies who have adopted equity incentive plan after the implementation of share-trading reform in china. The whole dissertation is lined by the study on the . contribution of share incentive mechanism in the company performance growth, while stressing the role of the relevant restrict mechanism. Finally it focuses on the function of incentive and constraint interaction. To be more specifically, I try to set in the model several representative variables about the supervision from outward corporate interest groups and to make quantitative analysis of the restraint factors in equity incentive plan, such as scheme valid time limit, exercise price and granting conditions. Further more, I will fully discuss how the interaction of incentive and constraint system improves company development. Consequently the aim of the thesis is trying to highlight the rational arrangement of incentive and constraint mechanism.Secondly, the main content and Research approachThe research is mainly empirical analysis by conduct descriptive statistics and multiple linear regression analysis. In the part of literature overview and theoretical analysis, some methodological norms are taken use of, such as compare, summary and so on. The main content of this thesis are separated into 7 parts.Chapterl Introduction. This part involves the introduction of research background and extract of issues, the study purpose, meaning, design and structure.Chapter 2 The literature review and assessment. Either domestic or foreign empirical studies on the relationship between equity-based incentives and company performance are referred to help proving my analysis. These studies are summarized into four sections:Firstly, incentive-performance related theory; secondly, incentive-performance irrelative theory; thirdly, documents regarding the role of incentive and constraint mechanism in corporate management; the last, some material about how to choose related control variables in similar research. Finally, I advance a comprehensive assessment and turn to my own study.Chapter3 Theoretical analysis about equity-based incentive and constraint mechanism. This part is composed of Contract theory, Principal-agent theory, Human Capital theory and finally the function of incentive and restraint mechanism, summarized by corporate governance theory, "carrot and stick" ideology, agency costs theory, etc.Chapter 4 The overall inspection of equity-based incentive practice in Chinese listed companies:compare different phases; explain different applied patterns with its definition, advantages and disadvantages; reveal statements about several crucial issues in laws and regulations, such as the exercise price, performance assessment indexes. Lastly, traverse the developing pace, industry distribution, statistic of exercise bindings and the company performance after adopting the plan.Chapter 5 The research assumption and model building. Firstly Propose the assumptions basing on relevant principles, and then describes the research methods and sample selection, thirdly explain the definition of different variables, and eventually establish a multiple linear regression model.Chapter 6 Conduct data operation by SPSS and analysis the results, including descriptive statistics, the correlation and regression analysis. Using the examined data results, some essential conclusion of this thesis can be elicited by comparison and summary.Chapter7 Presents my conclusions and policy suggestion.Thirdly, Summing-up, Contribution and shortages.The purpose of the research is to stress that incentive must be matched with rational restraint. My paper has certain contribution on the following aspects.a. Overview the implementation of equity incentive system in china listed companies with the latest data after the "split share structure reform" and verify its positive function on company performance growth;b. Emphasize the importance of constrain mechanism, set up two kinds of binding variables in the model. One is the restraint factors of equity incentive plan itself, such as scheme valid time limit, exercise price and granting conditions, the other is the supervision from corporate governance and outward corporate interest groups.c. Detect how did the interaction of incentive and constraint system improves company performance, point out the importance of matching share incentive by constraint mechanism.d. Study the long-term effect of equity incentive on corporate performance increasing.The main summing-up of this paper is that:the equity incentive mechanism in has played a significant role in china listed companies'performance promotion, Compared to the others, the private companies have more obvious performance promotion after implementation of that plan; The incentive-related constraint mechanism, Involving the program binding conditions and the interest groups outside the company, have played their roles in the supervision of corporate operation but somehow weakened the impact of equity incentive scheme on performance; After the "Utradable Shares Reform", the listed companies' equity-based incentive has displayed certain long-term effect, but this function is very weak; it is worth noting that the interaction of incentive and restraint system has a great function on the performance increase. In view of the conclusions above, it is suggested that china's listed companies should try their best to improve the corporate governance lever and should pay more attention to the role of constraints system while propel the equity-based implementation. The reason is that effective regulatory environment is a premise to obtain the benign development of equity incentive theory. Only the corporate governance system in which incentive and restraint mechanism is rational arranged can provide the lasting power for a company to achieve persistent development.Although I have already tried my best, there are still some shortcomings in this paper. Firstly, incentive and restraint mechanisms are wide-ranging, but my article deals only with the subject of equity-based incentive and several constrain variables, it is possible that the research may lack of comprehension; Secondly, the study has not specified the samples by incentive plan objects, industry, corporate region or incentive patterns; Thirdly, some data is hard to collect, so there may be some data bias in mine processing.