A Study On The Motivation And Performance Of Hi-Target’s Equity Incentive Cancellation And Re-announcement

Since the CSRC piloted the management approach in 2006,China’s equity incentives have been developing rapidly.The equity incentive mechanism can not only promote the synergistic interests between managers and owners and solve the principal-agent problem,but also have the effect of talent retention.Therefore,the proportion of stock option income in the compensation structure of company managers has been increasing in recent years,and the equity incentive has entered the era of "normalization".However,as a result of the changing market environment,business environment and fluctuations in the company’s share price,many evaluation indicators and exercise conditions of the incentive program are no longer feasible,and it is difficult to achieve the expected incentive purpose and effect by continuing to implement the original program.In such a background,more and more listed companies choose to cancel the original incentive plan and re-announce the new plan to modify or reset the incentive plan.However,according to the existing research,the cancellation of equity incentive plans may increase the turnover rate of executives and the agency cost of the company.Besides,China’s accounting rules require companies to accelerate the exercise process of granted equity instruments when canceling equity incentive plans,thus causing dilution of company’s profit.Even so,there are still many listed companies that revise or reset their plans by cancelling and re-announcing their equity incentives every year,which leads to the following research question: What is the motivation behind an act of this kind? What is the effect of doing so on the company’s performance? Taking Hi-Target as an example,this paper analyzes the internal and external motivations and performance impacts of equity incentive plan re-announcement by synthesizing the research results and related theories from domestic and international literature.After the re-announcement,the equity incentive changed from stock options to restricted stock model,which further expanded the incentive scope in the number of shares and personnel,and the exercise price and performance assessment conditions were adjusted.As for the motivation of equity incentive re-announcement,most of the current studies focus on the macro environment such as capital market,national policies and industry development,however,in fact,the companies that choose to re-announce their equity incentives have unique corporate development stages and strategic choices,and the existing literature lacks in-depth analysis in this aspect.Therefore,this paper explores the motivation of Hi-Target’s equity incentive re-announcement from the individual level: Firstly,the influence of external macro environment and industry situation.The fierce market competition brought by price war,economic downturn and weakening policy subsidies lead to the loss of external conditions for equity incentives to be implemented smoothly.Secondly,it reduces the loss of core personnel.Hi-Target showed multi-level demand for talents,however,the original equity incentive plan did not play a role in retaining talents,but led to the successive departures of executives.By re-announcing the equity incentive plan,Hi-Target’s core personnel retention rate increased significantly,and to a certain extent,the loss of core personnel was curbed.Thirdly,it helps to upgrade business and realize strategic transformation.The re-announced share incentive plan considered the needs of business upgrading and strategic transformation of the company in the selection of incentive targets and the setting of assessment conditions,which helped accelerate the completion of the company’s emerging development strategy.Fourth,no expense is recognized for active cancellation.The original equity incentive plan of Hi-Target has not yet been actually granted,so the active cancellation not only eliminates the need to recognize share-based payment expense,but also avoids the high time cost of waiting for the natural lapse.In terms of performance,this paper firstly investigates the short-term market reactions during the three windows of equity incentive launch,cancellation and re-announcement,secondly analyzes the long-term performance of Hi-Target using financial indicators,also explores the company value through EVA calculation,and finally analyzes the changes of Hi-Target in R&D input and output.In the short term,equity incentive re-announcements may bring negative market reactions.After experiencing a lapsed equity incentive plan,investors tend to bring negativity to re-announced equity incentive plans,resulting in poor market performance for the company in the short term.But in the long term they help companies to improve their financial performance,innovation performance and firm value.Based on these findings,this paper proposes countermeasure suggestions,hoping to give certain insights to other firms,investors and regulators:(1)listed companies can restore the lapsed incentive mechanism by re-announcing the equity incentives;(2)investors should rationally view the behavior of re-announcing;(3)regulators can refer to the practice of the SEC to consider the re-pricing of stock options as self-tender offer and improve the mechanism related to re-announcing.