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Overview of Equity Incentive Plans and Employee Stock Ownership Plans of SZSE-listed Companies in 2019

Date: 2020-02-05

Equity incentive plans and employee stock ownership plans are important benefit sharing mechanisms of listed companies and significant institutional arrangements to give play to the function of the capital market to serve the real economy. In 2019, SZSE-listed companies launched a total of 218 equity incentive plans, which involve 3,715,700,500 shares, accounting for 2.29% of the total share capital in average; they launched 88 employee stock ownership plans, which involve CNY15.287 billion and 2,057,391,100 shares, accounting for 1.03% of the total share capital in average.

 

According to statistics, from 2015 to 2019, SZSE-listed companies launched 161, 199, 280, 281 and 218 equity incentive plans respectively, and 281, 127, 164, 96 and 88 employee stock ownership plans respectively. Specifically, 213 companies launched multi-phased equity incentive plans, and 153 launched multi-phased employee stock ownership plans. Equity incentive plans and employee stock ownership plans have become normal practices and effective means to improve corporate governance and strengthen employee cohesion and company competitiveness.

 

In terms of implementation on different boards, the SME Board and the ChiNext Board listed companies showed greater enthusiasm. In 2019, the Main Board, the SME Board and ChiNext Board listed companies launched 22, 78 and 118 equity incentive plans respectively and 18, 43 and 27 employee stock ownership plans respectively.

 

In terms of implementation by different industries, technology-incentive industries held a dominant position. In 2019, the top five industries by the number of equity incentive plans and employee stock ownership plans launched by SZSE-listed companies are computer, communication and other electronic equipment manufacturing, software and information technology service, chemical materials and chemical product manufacturing, electric machinery and equipment manufacturing, and special equipment manufacturing, which launched a total of 113 equity incentive plans, accounting for 51.83% of total plans, and launched 40 employee stock ownership plans, accounting for 45.45%.

 

On the whole, the equity incentive plans and employee stock ownership plans launched by SZSE-listed companies in 2019 have the following four characteristics:

 

First, company performance increased and long-acting incentive mechanisms showed effect. The SZSE-listed companies that implemented incentive plans in 2018 saw their operating income grow by 19.77% and 10.99% year on year in the first three quarters of 2018 and 2019 respectively and their net profit by -0.11% and 17.15% respectively. Both their operating performance and profitability are higher than the average levels of SZSE-listed companies, demonstrating remarkable effect of equity incentives.

 

Second, the number of repurchased shares increased, and sources of shares became more diversified. The new Company Law has supplemented six situations in which shares can be repurchased including employee stock ownership plans and equity incentive. The enthusiasm of listed companies that repurchase shares for equity incentive and stock ownership plans ran high. In 2019, 55 employee stock ownership plans launched by SZSE-listed companies used repurchased shares, up 358.33% year on year; 37 equity incentive plans used repurchased shares, up 208.33%. The sources of shares used by listed companies to implement incentive plans have become more diversified.

 

Third, private companies became the main forces, and state-owned enterprises sped up implementation. In 2019, of the SZSE-listed companies that launched equity incentive plans and employee stock ownership plans, private companies accounted for over eighty percent. In August 2016, the State-owned Assets Supervision and Administration Commission (SASAC) issued Suggestions for State-owned Enterprises with Mixed Ownership on Carrying out Employee Stock Ownership Pilot Programs, and in November 2019, the SASAC released Notice on Furthering Work Concerning Equity Incentive in Listed Companies Controlled by Central Enterprises, further improving the efficiency of equity incentive work in listed companies controlled by central enterprises. In 2019, SZSE-listed state-owned enterprises launched 34 equity incentive plans and 12 employee stock ownership plans, up 6.35 percentage points and 5.31 percentage points from 2018 respectively.

 

Fourth, the scope for participation of foreign employees expanded, and market openness improved. In September 2018, China Securities Regulatory Commission (CSRC) revised the Measures for the Administration of Equity Incentives of Listed Companies, expanding the scope of incentives to include foreign employees working overseas, which further improved the enthusiasm of foreign employees. In 2019, 63 equity incentive plans disclosed by SZSE-listed companies involved foreign employees, accounting for 28.90% of the total number of plans launched, up 3.63 percentage points year on year. Of those plans, 27 involved foreign employees working overseas, accounting for 12.39% of the total number of plans launched, up 5.27 percentage points year on year.

 

In 2019, we stuck to centering on information disclosure and adopted various measures simultaneously to guide listed companies in implementing equity incentive plans and employee stock ownership plans in a compliant, effective way, which provided guarantee for establishing long-acting incentive mechanisms and improving enterprises’ vitality and profit.

 

First, we optimized the system of rules and improved disclosure requirements. We streamlined the original three memorandums of SZSE and issued the Guidelines No. 4 on the Supervision and Administration of Listed Companies – Employee Stock Ownership Plan. Aiming at such situations in the implementation of employee stock ownership plans by SZSE-listed companies and relevant entities in recent years as high leverage risk, deep participation of big shareholders, continued inadequate information disclosure and suspected regulatory arbitrage in “equity incentive” plan setting, the Guidelines has refined the disclosure requirements on sources of funds, sources of shares, equity management mechanism and accounting treatment, improved the requirements on the review procedures, avoidance and information disclosure concerning all links from the planning to the end of an employee stock ownership plan, strengthened the pertinence and effectiveness of rules and protected investors’ right to know.

 

Second, we promptly paid attention to and inquired about relevant matters, and maintained market order. We paid close attention to and inquired about plans and implementation procedures that failed to meet relevant regulations, implementation of discounting that was suspected of benefit transfer, “equity incentivizing” of stock ownership plans, noncomparable performance indicators in earlier and later periods, arbitrary setting of evaluation indicators, etc. We required companies to supplement, explain and disclose the pricing basis and rationality of the plan and whether the plan was suspected of being involved in big shareholder benefit transfer or in regulatory arbitrage. Throughout the year, SZSE sent 55 letters of all kinds including letters of concern and letters of inquiry.

 

Third, we stuck to being service-oriented and improved compliance level. We held series special seminars on equity incentives and organized representatives of listed companies, the regulator and market institution experts to discuss such topics as adjustment of performance evaluation indicators and information disclosure on termination of plans and guide companies to carry out work according to regulations. Through comprehensive training programs such as board secretary qualification training, CFO training, continuous board secretary training and industry salon, we opened 14 relevant courses per session for listed companies, which covered subjects of equity structure design, pre-IPO equity operation, practical operation, accounting treatment, fair value measurement, information disclosure, tax planning and equity incentive of companies planning to get listed, to enhance rule consciousness and improve implementation efficiency.

 

Next, SZSE will conscientiously carry out the guiding principles of the 2020 CSRC System Working Conference, adhere to the main task of deepening financial supply-side structural reform, stick to the work requirements of “Four Respects” (respecting the market, rule of law, profession and risks) and “One Resultant Force” (seeking support from all sectors of society), follow the market-oriented, rule-of-law-based direction, improve the basic systems of the capital market, optimize long-acting incentive and constraint mechanisms, strengthen the vitality of micro entities, and facilitate listed companies in pursuing high-quality development.

Next, SZSE will conscientiously carry out the guiding principles of the 2020 CSRC System Working Conference, adhere to the main task of deepening financial supply-side structural reform, stick to the work requirements of “Four Respects” (respecting the market, rule of law, profession and risks) and “One Resultant Force” (seeking support from all sectors of society), follow the market-oriented, rule-of-law-based direction, improve the basic systems of the capital market, optimize long-acting incentive and constraint mechanisms, strengthen the vitality of micro entities, and facilitate listed companies in pursuing high-quality development.