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China’s Execs Sweating Over Stock Options  

2008-07-04 17:38:05|  分类: 默认分类 |  标签: |举报 |字号 订阅

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China’s Execs Sweating Over Stock Options

06-27 16:35 Caijing Magazine 

After nine years and billions of yuan in cash-ins, China is again reviewing stock options for state-owned company chiefs.

By Wen Xiu and Ming Shuliang

“Every day, I felt like I was sitting on a bomb just waiting to explode,” said a former senior executive at one of China’s major oil companies, CNOOC (NYSE: CEO, HKSE: 00883).

This executive with a ticking time bomb under his leather chair was referring to his own indecision over exercising stock option rights he earned before leaving CNOOC.

Such anxiety is common in China’s executive suites. And now government regulators, who have been honing stock option incentive rules since 1999, are moving to tighten the reward programs that allowed many company chiefs to pocket huge sums – despite an initial premise that options were merely “nominal” rewards.

Stock options are mainly offered to managers and highly skilled professionals in China. They are supposed to link salaries to a company’s long-term interests by allowing holders buy a certain amount of company stock at a pre-set price, with a view to profiting from rising stock values.

One executive treasure chest is stashed at China Mobile (HKSE: 00941, NYSE: CHL). The company saw its stock price soar as high as HK$ 158 per share last October 29, sending the market value for its stock options skyrocketing to HK$ 174 million.

Across the country, several individual executives can boast option book values that exceed 100 million yuan. But option-holding executives at Chinese, overseas-listed companies still speak about the issue privately; it’s taboo in public. Why the whispers? Because the windfall potential has escalated in step with rising stock prices for overseas listed SOEs.

In years past, stock options were considered nominal incentives because, in the eyes of many, all senior executives at SOEs were picked and appointed by the Communist Party under the assumption their stock options would never be fully exercised.

Today the idea of nominal stock options is dead. Among overseas listed SOEs, barriers to exercising stock options have been overcome, and some senior executives have received substantial rewards.

China Mobile – the world’s largest mobile phone services provider by customer base – is among them. The company launched a stock option incentives program in 1997, before the government officially started regulating stock options. The first recipients were the company chairman and senior executives. Later, the program was extended to branch executives.

Wang Jianyu, president of China Mobile, told Caijing his company’s options program was not a product of imagination but shaped with “a substantial, realistic touch.” China Mobile’s practice proved that stock options are “extremely beneficial” as incentives for employees, he said.

In particular, they’ve been good for management types. So far, 354 million China Mobile stock options have been exercised, earning the holders a combined HK$ 11.1 billion. Meanwhile, the telecom giant still has about 500 million stock options waiting to be exercised that could earn HK$ 65 billion, based on a share price of HK$ 130.

Other SOEs have tried to follow China Mobile’s lead, and some are currently in the process of crafting options programs. Yet experiences vary from one company to the next. Moreover, some programs have stumbled.

“These stock options are all fake,” an executive at PetroChina told Caijing. “Besides the stock option contract, we sign another contract which commits (executives) to ‘not exercise these rights with liberty.’”

Checkered History

SOEs generally adopted stock option programs after the government released a 1999 policy statement for SOE reform and development. The policy said SOEs should link management income with business performance. A few enterprises were selected for an annual salary pilot project that included stock option rights. Options and other means of distributing compensation can be explored and advanced with experience.”

Liu Ming of Hay Group Consultancy, which designed stock option programs for several big-name SOEs, remembers that many early plans were based on the government policy document.

Nevertheless, between 2000 and ’04, regulatory officials focused more attention on option program details. In 2000, for example, a new law said high-skilled specialists who made contributions to companies could be rewarded with stock options or discounted stock.

A new wrinkle emerged when SOEs started trading stock on overseas markets. One source said that, in 2001, several SOEs that listed overseas got Ministry of Finance permission to exercise stock option rights. Among these, telecommunication operators were in the forefront because they were considered more closely linked to the marketplace.

At the time, the Chinese concept did not sell well on overseas markets. Overseas investors in companies such as China Mobile and PetroChina were concerned about whether stock option incentives could be effectively executed.

“Many investors viewed this (incentive program) as an important benchmark as to whether SOE leaders could be responsible for their enterprises,” said one senior executive at China Investment Corp., the investment bank that helped PetroChina list on the Hong Kong exchange.

And low compensation figures gave overseas investors the jitters. As recently as seven years ago, SOEs were hesitant to reveal their executive salaries. Yang Xianzu, chairman of China Unicom (HKSE: 00762, NYSE: CHU), stated in 2000 – when the company kicked off its IPO campaign – that the monthly salary for one of the company’s senior executive was less than 10,000 yuan.

Nevertheless, those who exercised their stock options made considerable amounts of money. And that led to more rule-making.

A new, trial policy that put constraints on incentives took effect in March 2006. It said stock options should not exceed 10 percent of a company’s capital base. The policy, called Measurement for State-owned Overseas Listed Companies, was released by the State-owned Assets Supervision and Administration Commission (SASAC), the investor representative for all state-owned enterprises outside the finance sector.

The policy also set a two-year wait for exercising stock options, and said the options should be rewarded every two years. Recipients had to be senior executives or highly-skilled professionals, the policy said, and earnings from expected stock options should be capped at no more than 40 percent of an annual salary.

Facing this new circumstance, many top executives decided against exercising their option rights. Nor did they explicitly state that they would give up their rights. These included PetroChina former chairman Ma Fucai, Sinopec ex-chairman Li Yizhong, the former chairman of CNOOC Wei Liucheng, and Bank of China-Hong Kong former chairman Liu Mingkang.

Yet, implementing this policy proved challenging. Nearly a year after it took effect, SASAC announced that “some overseas listed companies have not gotten their stock option programs approved by the authority. Some programs did not follow the law because stock options were rewarded too frequently, lock-up periods before exercising options were too short, and stock options were excessively given out. Also, some performance evaluations were poorly structured or non-existent.”

But a source admitted that the law never ruled out rights to exercise stock options. “If managers want to exercise these rights, they should do it quietly, or they should be sure that their staff will not file grievances,” the source said.

SASAC took another step in October 2007 with an announcement regarding “rigorously regulating overseas listed SOEs that provide stock option incentives.”

Meanwhile, the Ministry of Finance, which oversees state-owned financial institutions, began to strengthen implementation of stock options among Hong Kong-listed financial SOEs.

The ministry also ordered suspensions of stock option programs at China Life Insurance (HKSE: 02628), People’s Insurance Company of China PICC (HKSE: 02328), and the Bank of Communications (HKSE: 03328). Plans for programs at the country’s three, largest commercial banks – Bank of China (HKSE: 03988), ICBC (HKSE: 01398) and Chinese Construction Bank (HKSE: 00939) – are still under regulatory review.

Meanwhile, the finance ministry has been working on a new policy to regulate state-owned financial institutions for shareholding related incentives. A ministry source said no shareholding incentives would be reviewed until after the next policy is released.

1 yuan = 14 U.S. cents

See "Stock Option Logic and Reality" for analysis.

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