In the early 1990s, in order to address the prominent problems of insufficient development momentum in state-owned enterprises and the "big pot meal" of state-owned enterprise employees, the country began to promote and deepen the restructuring of state-owned enterprises. One important measure was to take the lead in introducing equity incentive systems in state-owned enterprises. In 2006, with the successive introduction of relevant laws and regulations, equity incentives for state-owned listed companies have laws to follow and have entered a rapid development track. However, for a long time, equity incentive has not played its expected role in state-owned and non listed companies. Even due to the previous lack of sound relevant laws and policies, coupled with strict supervision of state-owned assets and cumbersome approval procedures, equity incentive has become a system design that state-owned and non listed companies dare not touch. So, under current conditions, is it appropriate to implement equity incentives in state-owned non listed companies and how to implement them? This article will try to explore the above issues.

 

1、 Legal and policy support for state-owned enterprises to implement equity incentives

 

Since the 1990s, equity incentive as a supporting measure for deepening the reform of state-owned enterprises has roughly undergone the following stages of development:

 

（1） From the 1990s to 2004 - the initial and exploratory stage

 

Since 1998, some parts of China have begun exploring the trial implementation of stock option system in state-owned enterprises. The "Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning the Reform and Development of State-owned Enterprises" issued in 1999 provides policy support for equity incentives in state-owned enterprises, namely, "establishing and improving incentive and restraint mechanisms for managers and managers of state-owned enterprises. Implementing a linkage between the income of managers and the operating performance of the enterprise... A few enterprises have experimented with the distribution methods such as the annual salary system for managers (factory directors) and holding equity." In the same year, Wuhan, Shanghai Three cities in Beijing have formulated relevant policies, with a total of about 30 pilot enterprises. In 2002, the Ministry of Finance and the Ministry of Science and Technology jointly issued the Guiding Opinions on the Pilot Work of Equity Incentive in State-owned High and New Technology Enterprises, which proposed for the first time to carry out equity incentive pilot work in state-owned high and new technology enterprises. In 2004, the SASAC issued the "Interim Measures for the Salary Management of Central Enterprise Principals", proposing to gradually promote medium - and long-term incentive measures such as stock options on the basis of standardized management.

 

（2） From 2005 to 2008 - preliminary development and towards the stage of legalization

 

In 2005, the Company Law was amended to add a situation where a company can acquire its own shares, namely, "rewarding its employees with shares.". In 2006, the CSRC issued the "Measures for the Administration of Equity Incentive in Listed Companies (for Trial Implementation)". In the same year, the "Trial Measures for Implementing Equity Incentive in State-owned Listed Companies (Overseas)" and "Trial Measures for Implementing Equity Incentive in State-owned Listed Companies (Domestic)" jointly issued by the SASAC and the Ministry of Finance also took effect successively. Since then, China's state-owned enterprises, especially state-owned holding listed companies, have entered the legal track of equity incentives. Affected by the three pilot measures issued in 2006, the number of equity incentives implemented in state-owned enterprises reached a peak in 2008.

 

（3） From 2008 to 2010 - cleanup, standardization, and slow development stage

 

In the process of promoting the shareholding system reform in state-owned enterprises, due to the imperfect laws and regulations related to equity incentive and the lack of operational guidance, some problems have occurred in the process of carrying out employee stock ownership in state-owned enterprises. The SASAC issued documents in 2008 and 2009 to regulate the issue of employee stock ownership and investment. The Ministry of Finance also cleared and suspended the equity incentive and employee stock ownership plans of state-owned and state-owned holding financial enterprises during the same period. It was not until 2010 that equity incentives in state-owned enterprises continued to advance.

 

In February 2010, the Ministry of Finance and the Ministry of Science and Technology jointly issued the Notice on Printing and Distributing the "Implementation Measures for Equity and Dividend Incentives for Enterprises in the Zhongguancun National Independent Innovation Demonstration Zone", which is applicable to state-owned and state-owned holding institutions in the Zhongguancun National Independent Innovation Demonstration Zone, high-tech enterprises, universities and scientific research institutes in the demonstration zone, as well as other scientific and technological innovation enterprises that are priced and invested in scientific and technological achievements. Since then, the field of high-tech enterprises has become the main position for carrying out equity incentive pilot projects. In October 2010, the State-owned Assets Supervision and Administration Commission (SASAC) issued the "Notice on Conducting Pilot Work on Incentive of Dividend Rights in Some Central Enterprises". Since then, state-owned enterprises have begun to subdivide industries, select exemplary enterprises, provide differentiated and classified guidance, and actively and prudently restore and continue to promote the implementation of equity incentives for state-owned enterprises through the formulation of specific operational norms.

 

（4） Since the Third Plenary Session of the 18th Central Committee in 2013 - a stage of rapid development

 

In 2013, the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) adopted the "Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Comprehensively Deepening Reform", which proposed that "the mixed ownership economy should be allowed to implement employee stock ownership in enterprises, forming a community of interests for capital owners and workers." Since then, employee stock ownership in state-owned enterprises has received strong policy support. On March 1, 2016, the Ministry of Finance, the Ministry of Science and Technology, and the SASAC jointly issued the "Interim Measures for Equity and Dividend Incentives in State-owned Science and Technology Enterprises" (Cai Zi [2016] No. 4, referred to as "2016 No. 4 Document"), which provides detailed and clear regulations on how state-owned science and technology enterprises implement equity incentives. In August 2016, the SASAC, the Ministry of Finance, and the China Securities Regulatory Commission jointly issued the "Opinions on Carrying out the Employee Stock Ownership Pilot in State-owned Mixed Ownership Enterprises" (GZFG (2016) No. 133, referred to as "2016 No. 133"), providing operable guidance for carrying out the Employee Stock Ownership Pilot in State-owned Mixed Ownership Enterprises. Subsequently, various local provinces and municipalities have issued supporting implementation rules for carrying out employee stock ownership pilot projects in state-owned holding mixed ownership enterprises. Shanghai, Guangdong, Fujian and other provinces and cities have taken the lead in carrying out employee stock ownership pilot projects, and have formulated detailed rules for the implementation of employee stock ownership pilot projects. In 2017, Shanghai released a pilot list of three batches of employee stock ownership, including 9 enterprises including Shanghai Electric Guoxuan New Energy Technology Co., Ltd., Shanghai Qicheng Network Technology Co., Ltd., and Shanghai Comprehensive Bonded Zone International Logistics Co., Ltd; Guangdong also released the first batch of pilot list of employee stock ownership in the same year, including three enterprises, namely, Guangzhou Academy of Building Sciences Co., Ltd., the Pearl River Emerson Digital Musical Instrument Co., Ltd., and Hualian Futures Co., Ltd. In addition, Beijing, Liaoning, Sichuan, Shanxi, Anhui, Gansu, and Tianjin have also successively issued relevant policies to support and standardize the deployment of employee stock ownership pilot work.

 

In November 2017, eight ministries and commissions, including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Human Resources and Social Security, jointly issued the Opinions on Several Policies for Deepening the Pilot Reform of Mixed Ownership, which states that:, "Adhering to the principles of compliance with the law, openness and transparency, based on increment, fixed stock, the same price for the same share, cash based shares, job based shares, and dynamic adjustment, actively promoting employee stock ownership in pilot enterprises of mixed ownership reform. The number of pilot enterprises is not subject to the quantitative limit specified in Document 133." Since then, equity incentive and employee stock ownership plans have broken through the limitations of the state-owned enterprise industry, Expand from state-owned technological enterprises to all industries except state-owned financial enterprises. In October 2019, the SASAC issued the "Operating Guidelines for the Reform of Mixed Ownership in Central Enterprises", reiterating "encouraging mixed ownership enterprises to comprehensively utilize medium - and long-term incentive policies such as employee stock ownership in state-owned mixed ownership enterprises, equity incentives in state-owned listed companies, equity incentives in state-owned technological enterprises, and dividend incentives.".

 

（5） Summary

 

In summary, although equity incentives in state-owned enterprises have fluctuated slightly in the development process, they are generally on the upward trend. Initially, equity incentives for state-owned enterprises were only carried out in technological enterprises, but now they have been extended to enterprises in almost all fields except financial state-owned enterprises. The equity incentive model has also gradually enriched from the initial equity incentives, technical stock discounts, and dividend rights to stock options, restricted equity, and employee stock ownership plans. Since 2006, equity incentive has entered the stage of legalization, and the operability of relevant regulations and policies has gradually increased. Especially since 2016, the enthusiasm of state-owned and non listed companies in various regions to carry out equity incentive pilot projects has become increasingly high, and there are more and more successful cases. It can be seen that state-owned non listed companies are gradually breaking the awkward situation of not daring to try equity incentives, and developing rapidly in a standardized and legalized manner.

 

2、 Successful Case - China Electric Employee Stock Ownership Plan

 

China Electric Appliance Research Institute Co., Ltd. (hereinafter referred to as "China Electric Appliance") was founded in 1958, and is affiliated to China National Machinery Industry Group Co., Ltd. (hereinafter referred to as "China National Machinery Industry Group"), an important state-owned backbone enterprise directly under the central government. It is a national level innovative technology enterprise integrating three core business segments: scientific research and development, scientific and technological services, and scientific and technological industry. Guoji Group, the controlling shareholder of China Electric Appliances, directly holds 54% of the shares of China Electric Appliances, while indirectly holding 6% of the shares through its holding subsidiary Guoji Capital, with a total shareholding of 60%.

 

In November 2016, China Electric was approved to become one of the first 10 central enterprises to carry out employee stock ownership pilot projects. China Electric hopes to effectively solve the serious drain of core talents and the bottleneck problem of enterprise development through the implementation of employee stock ownership plan. The main elements of the China Electric Employee Stock Ownership Plan are as follows:

 

（1） Shareholding mode - capital increase and share expansion+employee shareholding

 

China Electric follows the principle of "incremental introduction, interest binding, position based shares, and dynamic adjustment", and adopts the method of capital increase and stock expansion to carry out employee stock ownership.

 

（2） Incentive Target and Number of Shareholdings

 

The incentive targets are scientific research personnel, business management, and business backbones who work in key positions and have a direct or significant impact on the company's operating performance and sustainable development, mainly including employees at middle level and above in the company, and core backbones engaged in scientific research, management, and market development.

 

The total shareholding ratio of China Electric's employee stock ownership plan is 27%. In addition, China Electric has taken the measure of reserving 1% of the company's equity for the incentive of new key employees. See the following table for details:

 

 

（3） Share purchase price

 

The incentive object subscribes for equity based on the purchase price of the strategic investor, whose purchase price is confirmed by the Shanghai United Property Rights Exchange through bidding.

 

（4） Source of subscription funds

 

The source of funds for incentive objects to subscribe for equity is their legitimate income and funds raised through other means.

 

（5） Shareholding carrier - dual shareholding platform

 

In order to effectively avoid legal risks, China Electric adopts a two-level shareholding platform structure. First, Guangzhou Kaitian Investment Management Center (Limited Partnership) (referred to as "Kaitian Investment") was established as the first level shareholding platform for China Electric employees, and Guangzhou Liwei Asset Management Co., Ltd. (with a capital contribution ratio of 0.00% due to rounding reasons) was established as the general partner and executive partner of Kaitian Investment, Additionally, 13 limited partnerships such as the Investment Management Center (Limited Partnership) of Guangzhou Electric Power Research Institute will be established as limited partners of Kaitian Investment. The employees of the company indirectly hold the company's equity through the above 13 limited partnerships, as shown in the following figure:

 

 

 

（6） Implementation effect

 

By adopting a two-pronged approach of "mixing equity and reforming the mechanism", China Electric has entered the fast lane of development. In 2017, the newly signed contract amount of China Electric increased by 40% year-on-year, the operating revenue increased by 26% year-on-year, and the total profit increased by 50% in the same caliber. In particular, employee stock ownership plans address the problem of companies being unable to retain talent. Before employee ownership, the annual turnover rate of China Electric employees was about 10%, and after the introduction of the employee ownership plan, it decreased to about 4%.

 

On October 25, 2019, China Electric Appliances (stock code: 688128) successfully landed on the Science and Technology Innovation Board on the Shanghai Stock Exchange. From the approval of the employee stock ownership pilot project in November 2016 to the successful listing of the Science and Technology Innovation Board in October 2019, it took less than three years for China Electrical Appliances to demonstrate the strong empowerment of the employee stock ownership plan for China Electrical Appliances.

 

In addition to the successful implementation of equity incentives by China Electric Appliances, in 2007, Hangzhou Hikvision Digital Technology Co., Ltd. launched the first phase of the equity incentive plan before the listing of A-shares on the Shenzhen Stock Exchange's small and medium-sized board; In 2017, when introducing strategic investors such as Beijing Shougang Fund Co., Ltd., Ouye Yunshang Co., Ltd. simultaneously carried out an employee stock ownership plan. Shandong Communications and Transportation Group Co., Ltd. publicly listed strategic investors through the Shandong Property Rights Trading Center and simultaneously implemented an employee stock ownership plan; In 2018, Hebei North China Pharmaceutical Huaheng Pharmaceutical Co., Ltd. implemented the "old shareholder capital increase and share expansion+employee stock ownership plan", Harbin Power Station Equipment Complete Set Design and Research Institute Co., Ltd. has listed on the Shanghai United Property Exchange to introduce two strategic investors, Hangzhou Boiler Group Co., Ltd. and Heilongjiang Dazheng Investment Group Co., Ltd., and simultaneously carry out employee stock ownership plans. These cases are successful cases where state-owned non listed companies have implemented equity incentives and achieved good results, This indicates that the practice of equity incentive in state-owned non listed companies has gradually developed.

 

3、 The Basic Principles and General Operating Norms of Implementing Equity Incentive in State-owned Non listed Companies

 

Although there are no uniform legal provisions on equity incentives for state-owned and unlisted companies, they are scattered in legal provisions such as Document 133 and Document 4 of 2016, as well as policy documents of central and local governments at all levels. However, through analyzing the above documents and combining with some equity incentive cases of state-owned non listed companies, the author summarizes the following basic principles and general operating norms that must be followed by state-owned non listed companies in implementing equity incentives.

 

（1） Basic Principles for Implementing Equity Incentive in State-owned Non listed Companies

 

1. Comply with laws and regulations, be fair and transparent, and prevent the loss of state-owned assets

 

Equity incentive in state-owned non listed companies involves the allocation of state-owned equity and assets. Therefore, strictly abiding by national laws and regulations related to the supervision of state-owned assets, ensuring the fairness and transparency of the operation process, preventing the loss of state-owned assets, and maintaining the preservation and appreciation of state-owned assets are the most basic principles and prerequisites that state-owned non listed companies need to follow in the implementation of equity incentive. This is mainly manifested in:

 

First, equity incentive plans need to be approved or filed by the state-owned asset supervision department. As stipulated in Document No. 4 of 2016, "Incentive schemes should be submitted to the departments, institutions, and enterprises performing the investor's or state-owned regulatory responsibilities for approval in advance.". Document No. 133 of 2016 stipulates that "the employee stock ownership plan of local pilot enterprises shall be submitted to the institution performing the responsibilities of the investor for filing, and a copy thereof shall be submitted to the state-owned assets supervision and administration institution of the provincial people's government; the employee stock ownership plan of central pilot enterprises shall be submitted to the institution performing the responsibilities of the investor for filing.".

 

Second, the purchase price must be subject to asset evaluation and must not be lower than the approved or documented net asset evaluation value per share. The company shall not grant equity to employees without compensation, and shall not provide financial assistance such as advances, guarantees, and loans to holders.

 

Third, related party transactions should be standardized during the implementation of equity incentives. As stipulated in Document No. 133 of 2016, "As a shareholding platform for employee stock ownership plans, it is not allowed to engage in any business activities other than shareholding.". Document No. 4 of 2016 stipulates that "if indirect shareholding is adopted, the shareholding unit shall not have a horizontal competition relationship or engage in related transactions with the enterprise.".

 

Fourth, after the completion of equity incentives, the controlling position of state-owned shareholders should still be maintained.

 

2. Combination of incentives and constraints, benefit sharing, and risk sharing

 

Equity incentives are not equity benefits. In the process of implementing equity incentives in state-owned enterprises, it is necessary to avoid the formation of a "new pot of rice" situation for employees, establish and improve a long-term incentive and constraint mechanism, and handle the relationship between short-term earnings of shareholders and the company's medium and long-term development. Through equity incentives, interest binding is formed, whereby the company and employees share market competition risks and development achievements, with a view to achieving a win-win goal.

 

（2） General operational norms for implementing equity incentives in state-owned non listed companies

 

According to the relevant laws and policies on equity incentives for state-owned enterprises and the aforementioned basic principles, combined with relevant cases, and in accordance with the six main elements of equity incentives, namely, fixed objects, fixed models, fixed quantities, fixed prices, fixed sources, and fixed conditions, the author attempts to summarize the general operating norms for implementing equity incentives in unlisted companies abroad as follows:

 

1. Fixed object

 

The incentive targets for equity incentives in state-owned non listed companies are mainly aimed at important technical and operational management personnel, key personnel, and core personnel who have signed labor contracts with the company. In principle, it is not allowed to hold all shares and engage in new "egalitarianism". At the same time, due to the particularity of the status of state-owned enterprises, there is also a negative list of incentive targets. For example, according to the provisions of Document No. 133 of 2016, "state-owned enterprise leaders appointed by the Party Central Committee, the State Council, and local party committees, governments, and their departments and institutions cannot hold shares. External directors and supervisors (including employee representative supervisors) do not participate in employee ownership. If multiple immediate family members are in the same enterprise, only one person can hold shares.".

 

2. Fixed mode

 

The main incentive models that state-owned non listed companies can adopt include equity sales, equity incentives, equity options, dividend incentive, and employee stock ownership plans. Enterprises can choose an appropriate incentive model based on comprehensive consideration of factors such as their own enterprise size, industry characteristics, development stage, and legal and policy support.

 

3. Fixed quantity

 

In order to ensure that the implementation of equity incentives does not change the state-owned holding position, there are certain restrictions on the number and proportion of employee holdings in state-owned non listed companies that implement equity incentives. For example, Document No. 133 of 2016 stipulates that "in principle, the total amount of employee stock ownership shall not be higher than 30% of the company's total equity, and the proportion of single employee stock ownership shall not be higher than 1% of the company's total equity.". According to Document No. 4 of 2016, "The total amount of equity incentives for large enterprises shall not exceed 5% of the total capital stock of the enterprise; the total amount of equity incentives for medium-sized enterprises shall not exceed 10% of the total capital stock of the enterprise; the total amount of equity incentives for small and micro enterprises shall not exceed 30% of the total capital stock of the enterprise, and the incentive equity obtained by a single incentive object shall not exceed 3% of the total capital stock of the enterprise. An incentive object that receives an equity incentive must purchase the equity stock of the enterprise at a ratio of not less than 1:1, and obtain an equity award." "The incentive shall be converted based on the assessed value at the time of implementation of the incentive, and the cumulative amount shall not exceed 3 million yuan.".

 

4. Fix a price

 

In order to prevent the loss of state-owned assets, when state-owned non listed companies implement equity incentives, employees need to make contributions in real gold and silver. The employee's share purchase price must be subject to asset evaluation and must not be lower than the approved or documented net asset evaluation value per share.

 

In addition, the existing legal provisions on equity incentives issued at the central level do not clearly stipulate whether employees must be listed in the property rights exchange for equity participation. In practice, it is common practice for state-owned non listed companies to implement equity incentives simultaneously when initiating mixed reform and introducing investors. Investors need to enter the market to determine the equity price through bidding, and the incentive object will contribute to purchase equity based on the equity price of the investor's listed transaction. It should be noted that the "Implementation Plan for the First Pilot Work of Employee Stock Ownership in Local State-owned and Mixed Ownership Enterprises in Shanghai" jointly issued by the Shanghai SASAC, the Finance Bureau, the Financial Office, and the Securities Regulatory Bureau clearly stipulates that "Non listed companies may not enter the market for trading when implementing employee stock ownership through capital increase and share expansion, and the purchase price shall not be lower than the evaluation value.". Therefore, with the development and maturity of equity incentive practices in state-owned and non listed companies, the national level may also hold a positive attitude towards employees of state-owned and non listed companies obtaining incentive equity without entering the market for bidding transactions.

 

5. Fixed source

 

The state encourages the use of equity increments formed through capital increases or new companies to implement equity incentives, but it does not preclude the use of repurchase to existing shareholders or legal transfer of equity to incentive targets by existing shareholders to address the source of incentive equity issues.

 

6. Fixed condition

 

The fixed conditions include not only the admission conditions for state-owned non listed companies that implement equity incentives, but also the performance evaluation conditions that need to be completed as agreed with the incentive objects during the implementation process.

 

Not all state-owned non listed companies can or are suitable for implementing equity incentives. The state has set different access conditions for state-owned non listed companies to implement equity incentives in different situations. In principle, the state encourages and supports commercial state-owned enterprises that have a high proportion of talent capital and technological contributions, clear property rights, standardized management, and whose main businesses are in fully competitive industries and fields to carry out equity incentives.

 

In addition, state-owned non listed companies should agree on performance evaluation goals with incentive targets during the implementation of equity incentives, or link the positions of incentive targets to performance, in order to achieve the strategic goals of attracting and retaining talent, achieving economic efficiency growth, and maintaining and increasing the value of state-owned assets.

 

（3） Summary

 

The above basic principles and general operating norms are only the same or similar in terms of "quality" of equity incentives for state-owned and non listed companies. However, due to the industry fields, characteristics and scale, development stages, legal support for equity incentives by the state, policy guidance, and the maturity of equity incentive practice development of each state-owned and non listed company, In addition to grasping the above basic principles and general norms, we should also pay attention to specific project analysis based on our own situation, and conduct pre communication with relevant approval and regulatory authorities to ensure that the implementation process of equity incentives is in compliance with the law.

 

4、 Conclusion

 

In summary, it can be seen from the historical evolution of regulations and policies for the reform and implementation of equity incentives in state-owned enterprises that the central and local governments have introduced relatively complete legal provisions and good policy guidance, and state-owned non listed companies have the external conditions and environment for implementing equity incentives. Recently, some state-owned non listed companies are carrying out equity incentive and employee stock ownership pilot plans in full swing. The author believes that conditional state-owned non listed companies should seize this new opportunity and a good social environment, adhere to relevant national laws and regulations, follow the guidance of national policies, grasp the basic principles and general norms for implementing equity incentives in state-owned non listed companies, summarize and absorb the relevant successful experiences of other enterprises, and prudently promote the implementation of equity incentive plans based on enterprise conditions, Through the power and empowerment of equity incentives, we strive to achieve leapfrog growth in corporate economic efficiency, make state-owned non listed companies bigger and stronger, and even achieve the strategic goal of listing.

 

(This article is translated by software translator for reference only.)