How To Design Effective Equity Incentive Plans In China

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企业该如何设计股权激励方案

“ Key message: How can companies use equity incentives to better survive and prevail the Post Pandemic? What factors should foreign investors in China pay close attention to when design equity incentive plans? 后疫情时代，企业如何利用股权激励帮助度过难关？在华外资企业股权激励又应该关注哪些问题？ ”

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The essence of equity incentive is the top-level structuring 

股权激励的本质关乎企业股权的顶层结构设计

Establishing their own long-term incentive system has always been a hot topic for companies and entrepreneurs. The essence of equity incentive is the top-level structure design of corporate equity, involving internal management shareholders, founding shareholders and external investor shareholders. 

如何建立自己的长效激励制度一直是企业和创业者思考的问题，股权激励的本质关乎企业股权的顶层结构设计，包括内部的管理股东、创始股东与外部的投资人股东等。

In China, for many successful companies, especially those in the Internet and technology industries, equity incentive has been a powerful tool to retain excellent talents and employees’ loyalties. It is also one of the secrets of the success for Alibaba, Huawei, Tencent, JD.com and Lenovo. Take Alibaba and Huawei as examples:  

在中国，对于很多成功的公司特别是互联网与科技行业而言，股权激励是留住优秀人才、圈住员工忠诚度的利器，也是阿里巴巴、华为、腾讯、 京东与联想成功的秘诀之一。以阿里与华为为例：

Alibaba group has started their own equity incentive at initial stage and developed their main measure “restricted stock units plan" after experiment, the plan is much like the Vesting clauses in the venture capital model. Employees obtains the share options year by year, and this is conducive to maintain the stability and motivate employees. It also provides leverage for Alibaba's buyout.

阿里巴巴集团于创业初期就开始了自己的股权激励制度，并研发出主要的措施“受限制股份单位计划”，这个制度很像创投模式中的Vesting条款，员工逐年取得期权，有利于保持团队的稳定性，员工的积极性，也为阿里的收购大局提供了筹码。

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Equity incentive is a key factor for Huawei's success

股权激励是华为取得成功的关键因素

Huawei has implemented four large-scale equity incentives plans 

华为至今已实施了四次大规模的股权激励

Four large-scale equity incentives数据来源Data from: www.capwhale.com

In 1990, the concept of internal financing and employee ownership was first proposed. It not only reduced the cash flow risk of Huawei, but also increased the sense of belonging and stability of the team.

1990年，第一次提出了内部融资、员工持股的概念。不仅降低了公司的现金流风险，也增加了员工的归属感，使得创业团队更加稳定。

In 2000, during the bubble of Internet economy, Huawei started the reform of "virtual restricted shares".It granted employees certain rights on dividends and share price appreciation, but Huawei reserves the ownership and voting right. The restricted shares are automatically invalid when employees leaving the company.  Its nature is to share future profits and replace part of cash compensation with equity.

2000年，互联网经济泡沫时期，华为开始实行“虚拟受限股”的期权改革。激励对象可以享受一定数量的分红权和股价升值权，但没有所有权与表决权，不能转让和出售，在离开企业时自动失效。其本质为对未来利润分红，用股权替代部分现金薪酬。

In 2003, Huawei's export was seriously affected by SARS, and the intellectual property rights lawsuit between Huawei and Cisco directly affected Huawei’s global market. In 2008, the subprime mortgage crisis in the United States caused the great recession.  In response, Huawei launched a new equity incentive plan to buy back management shares and adopted rationed stock for employees to purchase virtual shares. For example, employees need to actually provide 15% of the required funds, and the rest part are guaranteed loans from banks in the name of the company to help purchase the shares.  Since then, Huawei achieved a sharp rise in sales and net profit.

2003年，华为的出口受到“非典”的严重影响，与思科之间的产权官司又直接影响到华为的全球市场。2008年，美国发生次贷危机引起全球经济危机。作为应对，华为推出了新的股权激励政策收购管理层股权，同时也为员工购买虚拟股权采取了配股方式，如员工本人只需要拿出所需资金的15%，其余部分以公司名义向银行提供担保贷款，帮助购买公司股份等。自此改革之后，华为实现了销售业绩和净利润的突飞猛涨。

In 2013, Huawei launched the TUP (Time Unit Plan) incentive policy, which granted a certain number of free options to employees based on their job position, rank, and annual performance. TUP includes dividends rights and appreciation rights, but company reserves ownership. The proceeds need to be realized gradually over the next N years (linked to performance).  The rights of TUP will be cleared automatically after being cashed, and the settlement period is five years.

2013年，华为推出TUP（Time Unit Plan）激励政策，每年根据员工的岗位、级别和绩效，给员工分配一定数量的免费期权。TUP包括分红权和增值权，但无所有权，收益需要在未来N年中逐步兑现（与业绩挂钩）。TUP的权利兑现后自动清零，五年为一个结算周期。

Time Unit Plan of Huawei 数据来源Data from: www.capwhale.com

Huawei’s story helps us understand how profit-sharing schemes work at scale and the idea of an employee-owned company. Huawei’s equity incentive plan closely linked the company's development and employees' personal wealth. Internal financing synchronized with equity incentive can increase the company's capital and buffer the cash flow shortage.               

华为用股权激励将员工的人力资本与企业的未来发展紧密联系起来，员工获得股权，参与公司分红，实现公司发展和员工个人财富的增值，与股权激励同步的内部融资，可以增加公司的资本，缓冲现金流紧张。

Small and medium-sized entities (SMEs) need also make sureup to speed with equity incentive plans at different stages of their life cycle, a long-term incentive system focused on the future and form a common interest of employees with the company. Technology and innovative companies are highly dependent on founders and core technology teams. Therefore, enhance the attractiveness of talents by introducing more innovative equity incentive plans is critical for development of the company.

中小企业更需要根据自身发展的不同阶段设计适当的股权激励方案，一个着眼未来的长期激励体系，被激励员工的从而与企业形成利益共同体。科创企业高度依赖创始人和核心技术团队，因此，推出更具创新性的股权激励制度，增强吸引人才的能力，才能为企业的核心技术研发提供保障。

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How to use equity incentive as a tool to help companies survive and prevail the post pandemic? 

后疫情时代，如何利用股权激励帮助企业度过难关？

At the rising stage, such as when the business scale or sales reach a milestone; introduce venture capital; a shift in strategy; M&A and restructuring are good opportunities for a company to implement equity incentive plan. At present, the pandemic is still evolving along with the global economic downturn, many SMEs and start-ups, on the one hand, are facing high pressure of cash flow shortage, on the other hand, worried about the loss of staffs.  Investors can refer to the experience of Huawei and other successful companies, conduct equity incentive timely to attract, retain and motivate management team and key employees through equity combined with cash compensation. This is also a good way to optimize the corporate structure, reduce financial pressure, improve team cohesion.

企业在上升期，比如当规模、销售上升到一个里程碑；引入风投；战略上的调整；并购重组等都是股权激励的好时机。当下，疫情仍在演变，全球经济持续下行，许多中小企业及初创公司，一方面承受着高度的现金流压力，另一方面又担心员工流失。此时，有魄力的企业家可以借鉴华为等成功企业的经验，适时进行股权激励，配合有限的薪资留住管理层及核心员工，此举不失为优化企业结构、减轻资金压力、提高团队凝聚力的一种好方法。

Ten models of equity incentive

Equity incentive is not a " magic remedy " to help companies prevail but can help companies especially SMEs to retain key employees, reduce the risks, defer investments, and better survive the pandemic. The equity incentive models commonly adopted include virtual equity, restricted stocks, equity awards, stock options, profit-sharing, employee stock ownership and management buyout, etc. When design the specific plan, companies need to make judgment based on the comprehensive factors such as the business scale and positions of key employees in different stages of the development. It’s also important to combine the long-term and short-term targets, incentives and restrictions in order to fully motivate the team.In order to reflect the value of equity, it is necessary to do the strategic planning and design the business model, capital management model, and public offering path before the equity incentive plan.

股权激励的常用模式包括虚拟股权、 限制性股票、股权奖励、期股期权、收益共享、员工持股和管理层收购等等。企业在进行具体方案设计时，需要根据企业规模及企业核心人物在未来发展中的不同定位等实际情况来综合判断，充分调动经营者积极性并体现长短期激励结合、激励与约束结合等原则。为体现股权的价值，需先规划企业的资本运作，上市路径，商业模式和战略规划之后再设计股权激励方案。股权激励不是帮助企业挺过疫情的“特效药”，但却能够使企业，尤其是中小企业更好地稳住员工、降低风险和实现投资延期。毕竟活下来，就有希望。

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Equity incentive plans for foreign-invested companies in China

外资企业股权激励

The new Foreign Investment Law of China is inclined to be more open and fairer to foreign investors. For instance, the newest edition (2021) of negative list that prohibit or restrict foreign investments are further shortened. Fields not included in the list are fully open to foreign investments, and Chinese and foreign investors enjoy equal treatment.  Foreign invested companies may raise funds through public issuance of stocks, corporate bonds, and other means in accordance with law.  For wholly foreign-owned entities and Sino-foreign joint ventures, investors should pay close attention to the timeliness and new initiatives of the Foreign Investment Law, relevant regulations, and other special industrial provisions of China.  Consider not only how to motivate employees, but also how to protect the company, so as to develop a sound equity incentive plan.  

新的外商投资法对外国投资者更为开放和平等，例如：对于禁止和限制外国投资者投资的领域，以负面清单方式明确列出；清单之外充分开放，中外投资者享有同等待遇；外商投资企业可以依法通过公开发行股票、公司债券等证券及其他方式进行融资等。对于外商独资企业与中外合资企业而言，投资者应该密切关注《外商投资法》等相关法规的时效性及新动态和中国对于该类企业的特殊规定。不仅考虑如何激励员工，也要斟酌如何保护企业，从而制定出完善的股权激励计划。

With rich experiences, our professional team can help you with effective and customized equity incentive planning. From structuring to tax planning, we provide the most cost competitive service.  If you would like to know more about the specific applications of equity incentive, key factors of design, steps and methods, performance assessment, related tax issues，please feel free to contact us.

凭借丰富的经验，我们的专业团队可以帮助您进行有效的、定制化的股权激励规划。从结构设计到税务筹划，我们提供最具有成本竞争力的服务。如您想进一步了解更多股权激励设计的具体运用实例、设计的关键因素、步奏与方式、绩效考核及相关税务问题，请联系我们。