Redesign Of Lianfa Company's Long-term Incentive Scheme

Chinese companies started to practice the long-term incentives in 1993,while it had been firstly came up with in USA in 1950s.Since then,the long term incentives in China has been constantly practiced and developed and has achieved some improvement.China Securities Regulatory Commission has formally promulgated<Regulations of Stock-based incentives for Listed Companies>as well as<Instructions on Employee Stock Option Plan for Listed Companies>this two normative documents,providing a valuable reference for the companies to formulate the long term incentives.The continuous improvement of relevant laws and regulations is leading the long-term incentives to implement gradually on the right track.But subject to the conditions of Chinese market,the industry and the company itself,the effects of different kinds of long term incentives varies among different companies.According to many researches done by scholars,some long term incentives do achieve good effects,while the others' remained suspectable.What's more,they also find that managers tend to use the long term incentives as arbitrage,leaving companies and innocent investors to pay for it.It not only hurts the benefits of both companies and investors,but also disturb the formal operating of the market,making it harder to give the right valuation of a certain company.Under this circumstance,this paper selects Lianfa's long term incentive scheme as the main research object,introducing the company's condition and the specific design ideas,and analyzing the main purpose and consideration of designing the long term incentive scheme from the angle of industry and company itself.Lianfa's long term incentive scheme was launched in August 2016 and was confirmed by the board of directors("the Board")in September 2016.Trying to be more reliable,the Paper also selects three kinds of commonly used incentives:cash compensation incentive,employee stock ownership plan and stock options as the comparisons,summing up the problems they encountered when implemented in China,most importantly,comparing them with Lianfa's long term incentive scheme.In this way,the paper analyzes the reasons for Lianfa's long term incentives to choose cash compensation as the scheme basis and the similarity to American form of emplyoee stock option plan as the retirement plan design.Although with the advantages above,risks and insufficiency still exits in this new scheme.This paper discuss for long length in this part,trying to combine the classical theory on the basis of the original plan for the modification and supplement with the researches done by scholars.For example,legal risks;the added design when the revenue of asset management or trust investment is negative;tighter constraints together with the punishment mechanism to avoid the incentive from becoming a welfare;partial adjustment to the period of the scheme as a addition to the short-term inspiration;the design of non-circulation fund pool;strengthening of the supporting measure,especially implicit incentives and internal promotion.The paper chooses the principal agent model to analyze the scheme design.And pick up three aspects to analyze in detail:improve the company's performance,remain talents,deal with principal agent problems.Moreover,this paper also pay attention to individual income tax,investments of incentive funds,donation of unpaid incentive funds to get an overall understanding of this scheme.Added to the former part,the paper tries to analyze Lianfa's long term incentive scheme entirely.Like the other new plan,Lianfa's long term fund incentive plan does show some flaws remaining for correction.Considering its risks and flaws,this paper tries to modify and supplement this scheme with the support of Vroom's expectation theory.These supplements don't change the basic ideas and fundamental design of the cash compensation,since it's the soul of this plan.Finally,the paper combines the original design with author's suggestions to integrate the long term incentive fund scheme and put forward a incentive system on the basis of corporate governance:based on the net profit increase and return on equity this two indicators;tenure,position level,individual performance as the important evaluating standards,supplemented by implicit incentives,employee career development,internal promotion,group collaboration,and the other supporting measures.Then conclude the situation suitable for the application.With the punishment design,this scheme will no longer be a welfare but still maintain its characteristics as a retirement friendly plan.By cooperated with other parts of the whole company,the redesigned scheme will function as a system.Paper analyzes Lianfa's long-term incentive scheme based on Chinese enterprises and market,combined with the industry Lianfa is in and summarizes its scope of application.On the basis of the Lianfa's long term fund incentive scheme,the paper makes some modifications and supplements and builds up it as a system related to company governance,cooperated with other parts of the company.To catch up with the development of the incentive theory,the paper adds the new conclusions of scholars aboard found.