ABSTRACT
This study surveys equity-based compensation in China’s listed firms. We try to give a general picture of the institutional background, the evolution, the contract design and the economic consequences of equity incentive plans in China’s listed sector. Despite a short history starting as late as 2006, about 30% of listed firms have proposed equity incentive plans by the end of 2016. Stock options and restricted stocks are the main forms. Regulation and institutional factors shaped the development of equity-based compensation in China. The salient features include, but not limited to, a relatively short valid period of five years, the dominant use of accounting measures as performance hurdles, the regulated grant prices, the dividend protective exercise price and so on. Simple tests on the contract design point to the managerial power hypothesis of contracting. State-controlled listed firms subject to more regulation issue fewer and more conservative equity incentive plans. Firms are found to manage earnings to lower the grant prices and to overcome performance hurdles. Firms with equity-based compensations distribute more cash and stock dividends to lower the exercise prices. Even so, studies still find incentive effect of equity-based compensation in terms of improving operating efficiency and firm performance.
