What are the common equity incentives? What are the advantages and disadvantages?

At present, there are many kinds of equity incentive tools in the market. However, Futu employee stock ownership believes that the simplest difference lies in the different incentive payment methods. Common equity incentive tools are divided into two categories according to the payment method of the incentive object: physical stock incentive and cash incentive. Among them, real stocks include stock options and restricted stocks; The cash category includes stock appreciation rights and virtual share awards.

Stock option can be understood as the option that the company gives employees optimistic about the future development of the company. If the company's stock rises in the future, employees have the right to buy the company's stock at a low price.

Restricted stock refers to a certain number of company shares granted by the company to employees at low prices. Only when employees meet the conditions of the equity incentive plan, such as working years or performance targets, can they sell restricted stocks to earn profits.

Stock appreciation rights is the right granted to employees by the company. When the company's share price rises, employees can get the corresponding amount of share price appreciation income by exercising. Unlike real stock incentives, stock appreciation rights does not involve actual stock issuance and trading. Employees do not actually own shares and the corresponding voting rights and dividend rights. And the proceeds obtained after the exercise will be distributed in cash.

Virtual share reward means that the company deposits the shares granted to employees in the trust, and after the employees meet the incentive conditions, the trust sells the shares in the secondary market and distributes them to employees in cash. In fact, employees did not get real stocks, but got a cash reward from the stock price of a secondary market company.

Futu ESOP experts believe that there is no difference between the two, only the difference in temperament. Enterprises need to choose appropriate incentive tools according to their own situation.

For example, H-share companies usually choose cash incentive tools, including stock appreciation rights and virtual share awards. From the enterprise level, cash incentive tools will not affect the company's total capital and ownership structure, and shareholders' control rights will not be affected, so the incentive mechanism can be implemented more flexibly and conveniently.

From the employee's point of view, because the exercise transaction of H shares involves the overseas investment behavior of domestic individuals, it must be registered with the relevant departments according to the process before holding or trading. By adopting cash incentives, employees can avoid a series of declaration processes and get cash rewards.

Of course, the situation of enterprises is different, and the subtle differences in ownership structure and business layout will affect the design of equity incentive scheme.