Will share ownership decrease employee turnover rates?
September 12, 2012 | BY
clpstaff &clp articles &New draft Regulations will allow companies listed in China to offer stock ownership plans that could increase staff retention, but without additional incentives employees may be reluctant to participate
The China Securities and Regulatory Commission (CSRC) announced the move to allow more staff to benefit from stock ownership at the beginning of August. The draft Regulations set out an Employee Stock Ownership Plan (ESOP) that entitles employees of listed firms to purchase stocks on the secondary market.
“When employees' personal wealth is bound together with the company, they will keep business goals in mind, strive to find more customers and be devoted to cost savings that eventually benefit the company as well,” said Wang Lixing, a partner with King & Wood Mallesons.
Employees investing in their own company can also strengthen staff retention. Employee turnover rates in China reached 19% in 2010, well above the 5% rates commonly found in the EU and US, according to Roland Berger Strategy Consultants. The Plan offers a way to minimise high turnover rates, but whether employers will build on this remains to be seen.
ESOPs are common in mature securities markets and the Regulations show the Commission's confidence in the market. The CSRC is hoping to build on this, as the scheme will add to the overall strength of a listed company.
While the Plan seems attractive, in practice it will come down to how employers offer incentives with stock ownership. “If companies do not raise employees' salary or offer extra allowances for ESPO participants, it seems not so attractive to purchase shares as the same price as the secondary market,” said Wang.
In addition, there have not been any announcements regarding preferential tax policies for ESPOs. Unless details are released of these incentives, employers will find it hard to balance attractive stock options with those already available.
According to the draft Regulations, employees can use part of their accrued wages and bonus to buy stocks. The annual funds from an employer must be kept below 30% of the total cash compensation earned during the previous 12-month period. The stocks must also be held for at least 36 months.
The cumulative stocks held by employees in an ESOP cannot exceed 10% of the total capital stock. The number of stocks corresponding to share entitlements gained by an individual employee also cannot exceed 1% of the company's total capital stock.
“More incentives should be given to employees to participate in the plan. Without efficient participation by employees, ESPOs cannot fulfil its aims of retaining staff or improving management efficiency,” added Wang.
The draft Regulations could further connect employees with their company's performance. It also a chance for listed companies to tackle China's growing problem of staff retention, but additional incentives have to be offered. Listed companies need to consider whether the costs will outweigh the benefits.
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now