Research On The Implementation Effect Of Equity Incentive In Pharmaceutical Manufacturing Industry

Under the modern enterprise system,the separation of ownership and management rights has caused the first type of principal-agent problem.As a long-term incentive and restraint mechanism,equity incentive can help to alleviate the conflict of interest between shareholders and management,effectively reduce agency costs and raise firm value,which has been widely used in foreign enterprises since the 1950 s.In particular,due to the pharmaceutical manufacturing industry’s characteristics of high technology,high investment,high risk and long period,it is an essential way for pharmaceutical enterprises to strengthen their independent innovation capacity by implementing equity incentive for the purpose of driving executive to take risks and then carry out R&D activities,and besides stimulating and releasing the initiative and creativity of core employees to boost innovation output.Compared with western countries,equity incentive system was introduced late in China.It was not until January 1,2006 that the first Chinese equity incentive regulation,“Administrative Measures on Equity Incentive of Listed Companies(Trial)”(hereinafter referred to as the “Trial Measures”)officially issued.Since then,listed companies in our country generally started to use equity incentive as a kind of compensation tool,especially restricted stock and stock options.Among them,three pharmaceutical enterprises,Shuanglu Pharmaceutical,Hainan Haiyao and Con Bay,announced their equity incentive programs successively in the same year,and the pharmaceutical manufacturing industry was one of the earliest industries to implement equity incentive plans.In recent years,thanks to the vigorous development of the market economy,together with the “Administrative Measures on Equity Incentive of Listed Companies”(hereinafter referred to as the “Incentive Measures”)launched in2016 greatly refining the old equity incentive system,the adoption of equity incentive becomes a tendency for Chinese listed companies gradually.According to the report“China Entrepreneur Value Report(2022)” released by Shanghai Rongzheng Investment Consulting Co.,Ltd,as of December 31,2021,901 listed companies in Ashare market have implemented the second generalized equity incentive plans;Moreover,the total number of equity incentive schemes announced in 2021 was as high as 826,with a year-on-year increase of 82.74%.However in practice,owing to the mixed design of schemes,the implementation effect of many equity incentive plans is not satisfactory.And at the same time,scholars have not yet reached a consensus on whether equity incentive programs can improve operating performance,increase shareholder wealth,attract and retain key staff,and promote corporate innovation.Based on the foregoing background,this article takes Jiangsu Hengrui Pharmaceuticals Co.,Ltd(hereinafter referred to as “Hengrui Pharma”),a leading enterprise in the pharmaceutical manufacturing industry,as the case study object and analyzes the implementation effect of its equity incentive.The paper is organized into six sections.Section one introduces the research background and significance of the research,research contents and methods,then systematically combs the related domestic and international literature documenting on equity incentive motivation,equity incentive effect and its influential factors,and also points out the innovations and deficiencies.Section two defines two core concepts of the article: equity incentive and contract elements of equity incentive;meanwhile,interprets principal-agent theory,incentive theory and human capital theory,and subsequently take them as the theoretical basis for the following analysis.Section three reviews the developing history of equity incentive system in China and describes the implementation situation of equity incentive in the pharmaceutical manufacturing industry.Section four presents the specific contents of Hengrui Pharma’s equity incentive plans from the perspective of company file,implementation motivation,implementation process and contract elements of equity incentive.Section five analyzes the implementation effect of Hengrui Pharma’s equity incentive in the aspects of market reaction,operating performance and innovative performance.Section six provides conclusions and suggestions on the basis of previous analytical results,and finally discusses the future research directions.The research findings are as follows.Firstly,based on the event study method,the market reaction in both long and short term to the announcement of Hengrui Pharma’s equity incentive programs is positive.Secondly,the analytical results of projection pursuit method and under the economic value added perspective show that,the operating performance of Hengrui Pharma has increased after the adoption of equity incentive.Thirdly,using the DEA-Malmquist model to estimate,it could be concluded that the innovation performance of Hengrui Pharma has improved during the period of implementing equity incentive.What’s more,it is implied that the equity incentive plans implemented by Hengrui Pharma also play a role in retaining and attracting talents for the company through the analysis of its innovation investment.Therefore,grounded on the above statement,corresponding advice is put forward in the angle of enterprise,industry and system.To begin with,for Hengrui Pharma itself,the optimization measures for implementing equity incentive include adopting incentive tools flexibly(e.g.stock options),enlarging the proportion of shares granted moderately,continually perfect performance assessment method and enhance market value management.Next,as to the pharmaceutical manufacturing industry,the listed companies in pharmaceutical manufacturing industry should actively implement equity incentive and carry out performance assessment according to the industry characteristic with the aim of successful implementation and full play of the expected incentive effect for them.Last but not least,form the level of system,regulators of the main board in A-share market ought to further expand the policy space in terms of relevant provisions on contract elements of equity incentive,such as enriching incentive modes and relaxing restrictions on the grant price.