Equity compensation is commonly used in the US to reduce the principal-agency problem andincrease employee retention. However, much less is known about the use of equity compensationoutside of US but general sentiment is that it’s on the rise. This paper explores the use of equity- based compensation to incentivize executives and employees in companies in China, Hong Kong,and Taiwan.In the past, limited guidance existed in regards to equity compensation in China. However, manyChinese companies went public on the Hong Kong stock exchange as so called “red chip”companies and such firms have an interesting and varied track record with regards to the successof the use of equity compensation. Relative to mainland China and Hong Kong, Taiwan has had alonger history of stock-based compensation. Taiwan’s tech-boom of the 1990s was driven largely by stock-based-compensation largely in the form of stock-bonuses. The data show a steadilygrowing number of Taiwanese firms offering some sort of stock-bonus program to either itsexecutives or entire core staff. Studies have also shown that these stock bonuses have been veryeffective in attenuating many of the principle-agent issues inherent in fixed-wage compensationschemes, both at the executive level and at the staff level of organizations, and in helpingTaiwanese firms compete against multinational corporations for top-talent.
Equity Compensation in China in Hong Kong
This section looks at stock option compensation in China and Hong Kong. Because the mainlandChinese equity markets have only recently begun to mature, equity compensation in the mainlandis intimately tied to the Hong Kong exchange.
Private Unlisted Companies
Stock options are still difficult to execute in China for firms that are not listed on the Hong Kongexchange. In particular, for private companies not yet listed on the exchange, Chinese employeescan only exercise stock options if the underlying stock becomes listed or if the employer isacquired by a listed company. In contrast, in the US, employees can exercise their stock option by becoming shareholders in the company while the company is private. This means that using stock options as a means for employee retention for startups in companies in China is limited by thecompany’s ability to be acquired or go IPO. Many employees may find stock options not as greatas a form of compensation given the risk of prolonged vesting period.