Mystery shrouds CEO wages with many hidden payments
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E-mail Shanghai Daily, May 15, 2012
US model
In terms of stock option incentives, Chinese companies are rapidly adopting the US model. Among 1,725 public companies in China, nearly 250 offer stock option incentives, with close to half of them beginning to do so in the past two years.
Offering such incentives had achieved positive effects, including revenue growth or earnings growth for some companies.
At high-tech companies, stock options are a common form of incentive and have become an important part of executive compensation.
In the case of Shandong Sun Paper Industry Joint Stock Co, a public company in the private sector, the average annual compensation of its top three executives was raised from approximately 250,000 yuan to more than four million yuan with the implementation of stock option incentives, bringing its executive compensation in line with its earnings.
Sun Paper implemented its stock option plan starting in 2008. The earnings growth rate in 2009 was 52.97 percent; in 2010, it was 112.93 percent. At most private enterprises that are going public, stock options have become the norm.
However, stock option incentives still are not widespread in China.
In 2010, they were offered at only about 15 percent of the 1,725 public companies in the sample. Nor do they generally carry much weight, given that the average ratio of fixed salary to earnings-at-risk is 3:1, with fixed salary and earnings-at-risk accounting for 75.29 percent and 24.71 percent of total compensation respectively.
Distortions
Gao acknowledges that stock options are not common in China and believes that they should remain so. Generally speaking, he says, the meaning of "incentives" is lost when it comes to stock options because of the serious distortions in their use.
Indeed, stock options are morphing into a welfare system arrangement. In many Chinese companies, the beneficiaries of stock options cover a wide spectrum.
The strike prices of stock options at public companies in China are generally lower than their prevailing market rates.
The strike prices of restricted stock options in the announced plans of 91 companies in 2010 were mostly lower than prices in the secondary market, with the strike prices of 70 percent of these companies at only 50 percent of the prevailing prices of their stocks (on the announcement dates). Some were even less than 30 percent.
It meant that top executives could easily pocket high premiums by the exercise deadlines - a significant departure from the intended purpose of stock option incentives.
Exercise periods are necessary for stock options to act as long-term incentives.
Top executives are unable to sell the stocks they hold before the expiration of the exercise periods as a way to prevent any short-term actions on their part.
However, in the past two years, many public companies in China have seen the departures of top executives soon after their companies went public so that the executives could sidestep the exercise period and quickly cash in their holdings.
Adapted from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original, please visit: http://bit.ly/KRGWJa
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