Four Frameworks To Identify The "Grey Benefits" Of A-Share Employee Stock Ownership

Yang Ping, research fellow, Securities Acquisition Research Center of the 21st Century Capital Research Institute

As a supplement to the basic salary and bonus, ESOP has always been regarded as an important means to coordinate the interests of shareholders and employees and motivate employees. A lot of experience from domestic and foreign capital markets also shows that ESOP plays an important role in regulating employees' work enthusiasm, improving performance and promoting innovation.

Gree's first employee stock ownership plan has been settled with the end of the shareholders' meeting.

As a sample case of ESOP, it is valuable to observe whether the case can stand the historical test in the future operation.

According to the research data of 21st Century Capital Research Institute, up to now, 130 listed companies have offered ESOP plans since 2021.

With an initial capital of over 24.8 billion yuan, private enterprises are the main force in implementing ESOP, accounting for more than 90%. Most of them are concentrated in talent intensive high-tech industries such as electronics, computer, medicine, biology, chemical industry and communication.

Based on this background, the 21st Century Capital Research Institute Federal Reserve securities M & A Research Center (hereinafter referred to as 21 capital fed M & A Research Center) released the Research Report on employee stock ownership plan in China's capital market, that is, to answer the question of whether or not to do ESOP and how to do it.

A special background of the report is that there are many disputes in the current market, such as the difficulty to protect the interests of employees in ESOP, unreasonable scheme design, suspected infringement of the interests of small and medium-sized shareholders, and disguised transfer of interests. Returning to the "original intention" of ESOP and taking into account the interests of shareholders, companies and employees has become a "difficult problem" faced by many listed companies.

Based on our research, Huawei, Lenovo and other technology enterprises, through the establishment of employee stock ownership plan, bind the "money" of talents with the company's development, which not only continuously promotes the gradual growth of enterprises, but also enables employees to enjoy the growth dividend of the company. In the upsurge of state-owned enterprise reform in the 1980s, "internal employee stock" was used as a tool to promote the reform. However, since the promulgation of the company law in 1994, "ESOP" or "trade union shareholding" has gradually replaced "internal employee stock".

The domestic A-share market has only started to pilot ESOP since 2014. During the seven-year practice, many ESOP have played a positive role in encouraging employees, improving corporate governance structure, and conveying confidence to the market.

However, with the development of the market, some problems are gradually exposed.

Current situation of ESOP

In A-share market, listed companies try their best to encourage employees.

Compared with equity incentive, ESOP has considerable flexibility and autonomy in performance appraisal, and its coverage is more extensive, and it is supported by a considerable number of enterprises in the market.

According to the data of capital fed M & A Research Center, 186 listed companies have implemented ESOP in the past year.

According to relevant regulations, there are four main sources of shares used in ESOP: first, employees directly purchase from the secondary market; second, listed companies buy back the company's shares and then sell them to employees; third, subscribe for non-public shares; fourth, voluntary gifts from major shareholders. However, it can be seen from the employee stock ownership plan in the past year that most of the stocks are purchased from the secondary market, and most of them are sold to employees after repurchase.

From the perspective of management mode, most enterprises choose to be managed by the company itself, including "management committee, which is elected by the employees participating in the ESOP through the shareholders' meeting, supervising the daily management of ESOP and exercising shareholders' rights on behalf of the shareholders"; Only 44 enterprises have chosen entrusted management, and the entrusted management parties include trust, investment bank, futures, private equity institutions, asset management companies, etc.

Reasonable implementation of ESOP can achieve win-win results.

For the company, ESOP is intended to "stabilize the morale" and fully mobilize the initiative of employees by means of benefit sharing.

For employees, after subscribing for shares of the stock ownership plan, they are no longer just "working" employees, but become "masters" shareholders, which gives rise to a sense of "master".

For the market, the internal employees of listed companies subscribe for share holding plan shares, which conveys to the market their confidence in the company's future business development and capital market performance, which is equivalent to injecting a "booster" into investors and becoming the "booster" of many companies' share price rise.

However, as we need to consider the interests of large shareholders, employees and the company itself, the game involved is quite complex, and it is not easy to achieve win-win situation.

The capital fed M & a research center discusses the differences in ESOP from the perspectives of employees, major shareholders, and the development of the enterprise itself, trying to provide practical help to listed companies that are willing to try or are trying ESOP.

One of the controversies: tax increases the cost of holding shares

Once the scheme is set up unreasonably or promises to cover the bottom, it is easy to cause social problems.

For example, the main regulations involved in the implementation of ESOP, the Interim Measures for the management of ESOP of listed companies (hereinafter referred to as the Interim Measures) have no clear provisions on the issue price, but in the process of specific implementation, if the issue or subscription price is too high, the interests of employees can not be protected.

"The stock price of listed companies is affected by many factors, such as the macro market environment, financial policies, industry development, etc., the future stock price is uncontrollable, the employees themselves are vulnerable groups, and the capital is not surplus. If they buy at a high level, they need to bear a relatively large market risk in the future." 21 capital - Federal Reserve M & A Research Center believes.

But on the other hand, if the issue price or subscription price is too low, it can not play the role of "risk sharing".

According to market practice, ESOP differs from equity incentive in that it focuses on benefit sharing, so it has a wider range of participation (supervisors, major shareholders and actual controllers can not participate in equity incentive, but can subscribe for ESOP shares), less performance requirements are set, and shares are generally acquired according to market price.

Equity incentive focuses on long-term incentive, only for a small number of middle and high-level employees and core business backbones, and should be granted, exercise conditions. Therefore, the price discount of equity incentive is essentially to transfer part of the company's interests to reward the management and core staff with excellent performance. The cost of equity payment should be taken into account, and its implementation procedures and information disclosure requirements are more stringent.

If the employee stock ownership plan is made into a "profit and loss free" arrangement, it is obviously contrary to the basic principle of "self financing of profits and losses and self bearing of risks" in the interim measures, and has become a disguised equity incentive, which naturally leads to widespread doubts about "benefit delivery" and regulatory arbitrage in the market.

In addition, in the case that employees acquire shares of the company at a price lower than the market price, the tax problem will also lead to the actual cost of employees much higher than the price in the scheme.

Since ESOP has the characteristics of equity incentive and general investors of shareholders, in the absence of a clear tax policy, in general, the legal profession thinks that we should refer to the general tax treatment of equity incentive and stock investment.

Generally speaking, if an employee directly purchases the shares of a listed company from the secondary market, he / she is exempt from individual income tax by referring to the situation in which he / she buys and sells stocks in the secondary market; By subscribing for the non-public shares issued by listed companies, if the issuance price is in accordance with the administrative measures for securities issuance of listed companies, the listed company does not give additional incentives to employees and does not involve personal income tax.

However, if the stock is acquired through the company's repurchase, and the employee purchases the stock at a price lower than the company's repurchase price, the ESOP has the nature of equity incentive. In the view of the legal profession, it is necessary to refer to the provisions on individual income tax of stock option in CS [2005] No. 35 and GSH [2006] No. 902 "Salary income" is calculated and paid individual income tax. If it is purchased through the asset management plan, the above provisions shall also be referred to from the perspective of business essence.

The second controversy: motivate employees or kidnap employees?

If "scale" is improper, it is easy to turn "welfare" into "burden".

For example, in the employee stock ownership plan of Gree Electric appliances, another major controversial pain point is that the actual interests and rights of employees may be difficult to protect.

According to Gree's announcement, "the ESOP will be managed by the company itself after its establishment, and a management committee will be set up to exercise shareholders' rights on behalf of the ESOP".

It also stipulates that "based on the needs of employees to improve the value-added income of shares and participate in corporate governance through centralized management, the holders of the ESOP promise and authorize that the trade union will exercise the voting rights in accordance with the will of the trade union for the shares directly held due to the transfer of the stock rights and interests of the ESOP to the personal securities account before retirement from the company (excluding directors, supervisors, and Without the prior written confirmation of the trade union, the trade union shall not sell or set up a pledge on its own, otherwise the trade union shall have the right to recover the corresponding share income, and the relevant income shall be managed by the trade union in a special account and shall be enjoyed by other holders. The specific distribution method shall be decided by the owners. "

This means that although the evaluation period of the employee stock ownership scheme is two years, after unlocking, the employee can not dispose of the stock at will, and can only enjoy the dividend right, and the voting right of the employee's shares will be authorized to the trade union, and the trade union will vote according to the employee's will.

At the same time, the company establishes a management committee to exercise shareholder rights on behalf of employees. The management committee can decide when to transfer the shares to the employee's personal account. Before retirement, employees are not allowed to sell or pledge stocks on their own, and must entrust the voting rights of their shares to the labor union of the company. If the employee resigns or resigns before retirement, if the shares have not been transferred to the employee's personal name, the company can also cancel the benefit qualification and only need to return the original capital contribution corresponding to the holder.

In the view of some market participants, the design of Gree's employee stock ownership plan has greatly virtualized the majority of employees' shareholding rights. The purpose is to strengthen Dong Mingzhu's control over the company, and the implementation process may produce "counterproductive" effect among the staff.

In addition to the fact that unified management is easy to be "represented", there is a great controversy among employees about the behavior of "retirement" to obtain the right to deal with stocks independently.

In the view of entrepreneurs, requiring employees to hold shares until retirement is intended to retain employees for a long time. It can truly tie the interests of employees, enterprises and shareholders together. Employees will strive to create more profits for the enterprise, and they can also benefit at the same time.

However, some employees of listed companies think that this is not reasonable. "Our former company extracted a certain proportion of the net profit every year for the incentive fund, and then purchased the company's shares through the incentive fund to motivate employees. Therefore, a large part of our team's salary is paid in the form of stocks, but this part of the stock needs to be held until retirement, There's no way to leave. " A former employee of a listed company in South China was interviewed.

He further added: "this will cause a lot of problems. The core management of the company, the old employees do consider the cost of job hopping and stay in the company for a long time, but the young employees can not stay in the company for a long time. Firstly, there is a lack of reasonable promotion channels, and people with qualifications occupy the front; The second is that the price of getting stocks is relatively high, so most people will not take stock seriously. However, if some of the rewards should be given in the form of stocks, employees will think that their salary is unreasonable and they will not get the proper and sufficient salary treatment. "

The capital fed M & A Research Center believes that in the current market environment, "job hopping" and "leaving" are very common market phenomena. The agreement that the ESOP must be held until retirement can play a long-term role in locking employees, but to a certain extent, it also affects the "survival of the fittest" and the smooth "up and down promotion" mechanism of the management team of listed companies, hindering the inflow of fresh blood, which should arouse Market vigilance.

The third dispute: shareholders use ESOP to satisfy their selfish desires

Some of the major shareholders of listed companies have even made the promise of "no loss" in order to mobilize the enthusiasm of employees and enhance the confidence of investors.

In other words, once there is a loss in employee stock ownership, the major shareholders will compensate the employee loss, and some even promise a higher return.

Under such circumstances, many employees who didn't want to hold shares or were not able to hold shares also tried to raise funds to participate in the ESOP. However, under the special market situation, the results of many ESOP plans went against their wishes. Even some companies are still carrying private goods when launching ESOP, which is used as a tool for related parties to seek private interests.

The deep participation of large shareholders or actual controllers in the early days has made the concerted action relationship between them and the ESOP like a blur. It is not only possible to use the ESOP to buy and sell the company's shares to evade the supervision and disclosure obligations, but also to arrange the employee stock ownership plan to transfer the shares of the major shareholder to receive the offer for the major shareholder, Or as "secret weapons" in the struggle for control.

For example, in 2017, Lijun said that it would like to share benefits with employees and mobilize their enthusiasm.

Based on this, the company implemented the first phase of employee stock ownership plan. Some employees raised nearly 100 million yuan, and transferred 13.7 million shares from the controlling shareholder he Yamin and the important shareholder Wei Yong. However, due to the poor performance of the company's share price, the duration of the ESOP was extended twice in October 2019 and March 2020 respectively, and it was not sold out until September 2020.

However, after the expiration of the first phase of ESOP, Lijun immediately implemented the same technology and launched the second phase of ESOP. This time, employees need to borrow money from he Yamin, the actual controller, and use this money to take over the shares he has reduced.

In addition to this case, some employee stock ownership cases in the market have been questioned for market value management.

For example, Sany Heavy Industry Co., Ltd., which recently launched the ESOP, has its stock source in 2021 from the shares already repurchased in the company's special account for repurchase. However, the price of the shares bought back by employees is 35.73 yuan / share, while the average price of its stock repurchase is 12.7 yuan / share. This shows that the share holding cost of Sany's ESOP in 2021 is 2.81 times of its share repurchase price.

This kind of stock price hanging upside down is questioned by the market, and there is a suspicion of "market value management".

In some listed companies in China, the defensive motivation of large shareholders is hidden behind the incentive purpose of ESOP, which serves as one of the potential tools for large shareholders to strengthen corporate control under the background of decentralized ownership.

For example, Amway shares, whose ownership structure is dispersed, only 21.90% of Amway's largest shareholder held shares in 2017. In 2017, Amway's share price plummeted due to its sharp decline in performance. In the face of the sudden increase of acquisition risk, Amway launched the employee stock ownership plan and provided guaranteed return commitment for employees' self financing.

This operation is evaluated by the market as one of the measures taken by Amway, the largest shareholder, to consolidate its controlling shareholder status and resist external invasion.

Earlier, Zheng Zhigang, a professor of finance at Renmin University of China, pointed out in his column that when the major shareholders did not control the relative control rights, served as the chairman of the board, or were in the complex pyramid ownership structure, the employee stock ownership plan led by the major shareholders was more defensive. This trend has become more obvious after China's capital market entered the era of decentralized equity in 2015.

In its view, the implementation of ESOP driven by complex motivation inevitably leads to incentive distortion.

The research shows that, with the consolidation and strengthening of insider control pattern with the chairman as the core of ESOP, the possibility of large shareholders transferring and hollowing out the resources of listed companies is not reduced, but increased; The implementation of ESOP can not achieve the expected benefits, motivate employees, and then improve performance.

Dispute 4: can ESOP really promote the development of the company?

It is open to question.

A typical change is share repurchase. Since the release of opinions on supporting share repurchase of Listed Companies in November 2018, the employee stock ownership plan with shares purchased by companies has increased significantly. According to wind data, among the 130 ESOP plans released in 2021, 84 of the 130 ESOP plans were purchased by companies, accounting for 65%.

However, this has also caused another concern - whether the listed companies' use of large amounts of capital to buy back will affect the long-term development of the company.

Take Gree Electric appliances as an example. Since the completion of the mixed reform, the company has completed two phases of share repurchase, and the third phase is in progress. The first two buybacks were completed at the top.

According to the calculation of 21 Capital Federal Reserve merger and Acquisition Research Center, if Gree Electric Appliance's phase III share repurchase is also completed, the company's only share repurchase amount will cost as much as 27 billion yuan, exceeding Gree's full year net profit in 2020.

According to public data, in 2020, Gree's business income will drop by 14.97% to 170.497 billion yuan, and its net profit will drop by 10.21% to 22.279 billion yuan.

As of the first quarter of 2021, Gree's asset liability ratio was 62.56%.

In addition, because the existing rules give listed companies more independent space in the incentive assessment, the performance appraisal schemes of some ESOP schemes are highly controversial.

At present, the interim measures have not made provisions on how to set assessment objectives in employee stock ownership plans. However, referring to the administrative measures for equity incentive of listed companies, its conditions are relatively loose, only stipulating that "the performance appraisal indicators shall include the company's performance indicators and the individual performance indicators of the incentive objects".

"The relevant indicators should be objective, open, clear and transparent, conform to the actual situation of the company, and be conducive to promoting the competitiveness of the company."“ The individual performance indicators of incentive objects shall be determined by the listed company itself, "the listed company shall disclose the scientificity and rationality of the set indicators while announcing the draft equity incentive plan".

For example, the performance evaluation target of Gree Electric appliance is: in the first vesting period, the net profit in 2021 will increase by no less than 10% compared with that in 2020, and the cash dividend per share in the current year shall not be less than 2 yuan or the total cash dividend shall not be less than 50% of the net profit of that year; In the second vesting period, the net profit in 2022 will increase by no less than 20% compared with that in 2020, and the cash dividends per share in the current year shall not be less than 2 yuan or the total cash dividends shall not be less than 50% of the net profit of the current year.

From the perspective of the company's management, this goal is relatively stable and pragmatic.

In the view of some investors, under the influence of the new crown epidemic, Gree's performance in 2020 is relatively low, and the growth rate of 10% may be set too low.

In fact, the net profit of gree in the first quarter of 2021 is 3.443 billion yuan, which has increased by 120.98% year-on-year. According to the 10% growth rate, the net profit in 2021 is about 24.393 billion yuan, which is still lower than that of 24.827 billion yuan in 2019.

Four suggestions to promote the smooth operation of ESOP

Good use of this "double-edged sword" can, to a certain extent, avoid some short-term behavior and promote the long-term, sustainable and healthy development of the company. Therefore, ESOP is also regarded as one of the important means of mixed ownership reform in state-owned enterprises.

In this report, 21 capital fed M & A Research Center provides the following suggestions for reference:

1、 The capital fed M & a research center calls on trade unions to play a more active role in the implementation of ESOP in listed companies.

According to the interim measures, employees participating in the ESOP can elect representatives or set up corresponding institutions through the ESOP holders' meeting to supervise the daily management of ESOP, exercise shareholders' rights on behalf of ESOP holders or authorize asset management institutions to exercise shareholders' rights.

However, in the process of practice, the number of shares held by a single employee is often small, and the company's independent choice of management mode often results in the restriction of employees' exercise of shareholders' rights, and it is difficult to play the role of employee representatives in corporate governance and management, and even lead to social events and many disputes.

Therefore, we believe that when the listed companies implement the ESOP, local government departments and trade union organizations can represent employees to negotiate with the management of listed companies, standardize the registration and management of shares, actively communicate with employees about the operation and development of enterprises, participate in the supervision of the behaviors of managers, and stop the behaviors that are not in line with the interests of employees, Prevent employees from being "represented" or their interests being damaged.

2、 Optimize the tax policy of employee stock ownership and equity incentive, and reduce the tax burden.

Whether it is equity incentive or employee stock ownership, its "core" is to bind benefit employees, so that "talents" can change from passive "executor" to "operator" of company value creation, so as to obtain more sufficient sense of belonging and acquisition, so as to realize higher value. But the tax problem has made many employees hesitant. The capital fed M & A Research Center believes that in order to smoothly promote the implementation of ESOP and reduce the burden of enterprises, the regulatory authorities should formulate tax preferential policies as soon as possible, such as reducing part of the income tax for enterprises implementing ESOP, so as to help enterprises continuously practice and improve ESOP, and realize the win-win situation between enterprises and employees.

3、 We should encourage the service center for small and medium-sized investors to strengthen external supervision and lead small and medium-sized shareholders and employees to say "no" to acts that are not in line with the interests of the company and are suspected of infringing on the rights and interests of small and medium-sized shareholders and employees.

China Securities small and medium investors service center should help investors identify unreasonable motivation and interest demands in ESOP, lead employees to vote against it, and help listed companies scientifically design and reasonably arrange ESOP management mode and stock holding platform when designing ESOP, To avoid major shareholders or core management from directly or indirectly obtaining the voting rights of the shares corresponding to the ESOP; To supervise the listed companies to define the responsibilities and rights of major shareholders in the implementation plan of ESOP, standardize and protect the legitimate and reasonable rights of employees' shareholders by management organizations.

4、 The regulatory authorities should improve the laws and regulations on the implementation of ESOP in listed companies, strengthen the information disclosure standards of ESOP, and prevent the defensive motivation and other complex motivations that restrict major shareholders or management from launching ESOP by improving information transparency.

In view of the high leverage risk, deep participation of large shareholders, insufficient continuous information disclosure, and "equity incentive" in the implementation of ESOP by listed companies and relevant entities, the regulatory authorities should further refine the disclosure requirements of capital sources, share sources, equity management mechanisms and accounting treatment, We should improve the review procedures, avoidance requirements and information disclosure obligations of all links in the whole chain from planning to termination of ESOP, improve the pertinence and effectiveness of information disclosure of ESOP, guide listed companies to effectively implement ESOP in compliance with regulations, and urge intermediary agencies to return to their positions and fulfill their responsibilities, so as to provide guarantee for establishing a long-term incentive mechanism and improving the vitality and efficiency of enterprises.

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