A Study on Virtual Equity Incentive of Ordinary Staffs

Wang Xiaoning1st / CTGU

College of Economics & Management China Three Gorges University

Yichang, China wangxn@ctgu.edu.cn

Xu Biao2nd / CTGU College of Economics & Management

China Three Gorges University Yichang, China

xb84918@qq.com

Qi Yongjun3rd / CTGU College of Economics & Management

China Three Gorges University Yichang, China

qiyongjun@yahoo.cn

Abstract—In this paper, the concepts of “Ordinary Staffs” (OS) and “Virtual Equity” (VE) are defined. And then the paper elaborates the status of the virtual equity incentive of ordinary staffs (VEIOS) in recent years, based on which it anatomizes the views why OS needn’t be incented by VE. On this basis, the paper demonstrates the feasibility of VEIOS through three angles of “Feeling”, “Reason” and “Trend”, and puts forward some suggestions of VEIOS at last.

Keywords- Ordinary Staffs; Virtual Equity Incentive; Feasibility

I. INTRODUCTION

A. Concept of OS Different experts and scholars have different views on the

concept of OS. Zhang Weiying (1995) believed that OS refer to the staffs with non-aptness or management abilities [1]. Zhang Liangguo (2005) believed that OS refer to the middle-level staffs as well as workers at grass-roots in the companies [2]. Yang Yan (2006) believed that OS refer to the staffs whose positions are below the department managers [3]. Chen Jun and Wang Shuguang (2008) believed that OS are the fundamental human resource, including production workers, skilled workers, peasant workers and managers at the production line. And they work at the production and management line, directly creating the surplus value, in Marx’s passages [4]. Wang Manzhi (2008) believed OS are the staffs who account for 80 percent of the total staffs in the companies but only create 20 percent of total value of the companies. Moreover, OS are not the same as key staffs who are helpful to realize companies’ strategic goals and play an important role in the development of the companies [5]. From my point of view, the essence of OS isn’t described in the first and second concepts; the third one is defined from the post angle, which is too easy to be used; the fourth and fifth one lack the maneuverability in actual managing work.

Based on the above analysis, this paper believes that OS refer to the staffs with the following characteristics:

1) Worker quantity: OS account for most of total staffs in the companies. According to the Wang Manzhi’s concept of OS, the percentage of OS in the companies is 80 percent [5].

2) Value contribution: The average value contribution of OS is very low, but the total one of them is very high because

OS is the staffs who implement most of the operating decisions.

3) Post-authority: OS are implementing the companies’ decisions and their positions are low in the companies.

4) Compensation level: The salary of OS is much lower than the key staffs’ and the managers’.

5) Worker loyalty: OS are more loyal than key staffs. And generally only less OS staffs will leave the companies compared with key staffs.

6) Worker supply: Companies can easily find more OS in the human resource market because of their substitutability [5]. That is, the supply of OS is very big in the human resource market [6].

7) Investment cost: The investment cost of OS is much less than the key staffs’ because the society and companies invest less on them.

B. Concept of VE There are three main views on the concept of VE. Fan

Pengtao, Zhang Zongyi and Wu Jun (2006) believed that VE incentive also belongs to the equity incentive, and VE incentive is the equity incentive by using the unreal stock [7]. Hang Zheng (2007) believed that VE means the performance shares, which are awarded when managers or operators have realized their performance goals. And then the owners of VE can enjoy a certain amount of dividend payment. But the owners don’t have their property, voting right and the rights of transferring and selling. Moreover, the performance shares will be invalid if the workers leave the companies [8]. Zhou Yu (2007) believed that VE refers to the simulation equity like some performance unit, the net asset value per share generally, which is awarded to the staffs [9]. In my opinion, the first concept is better than the second and third one because it accurately interprets the essence of VE and is propitious to the flexible application of the staffs’ equity incentive in the companies’ actual work. Therefore, VE here refers to the unreal equity, including Phantom stock, Stock Appreciation Right [10], Performance Unit and Postponement of Payment [11] and so on.

C. Status of VEIOS 1) Research status of VEIOS in recent years

Different experts and scholars have different opinions on whether companies should incent their OS by VE. Some experts and scholars, such as Liu Zhifeng (2004) [12], Wei

978-1-4244-5326-9/10/$26.00 ©2010 IEEE

Jixin (2006) [13], Lu Peng (2007) [14], Fan Yiyang, Huang Lingyin and Jiang Luping (2008) [15], believed that VE should just be used to incent companies’ managerial force, key staffs, senior staffs and special staffs, and OS shouldn’t be incented by VE. Only several experts and scholars, such as Liu Yinguo, Wu Chengfeng (2007) [16], Zhao Zhengping and Ye Guocan (2009) [17], believed that VE should be used to incent the whole staffs, including OS. However, these experts and scholars didn’t explain the reasons in detail but only put forward their views, which is the main problem this paper will solve.

2) Status of equity incentive of OS in recent years Deng Na (2004) found that 44.26 percent of 61 listed

companies in her survey used VE to incent the operators. And the main patterns are performance unit (29.51percent of the total sample) and postponement of payment (11.48 percent of the total sample) [11]. Shen Yan (2007) found that 38.5 percent enterprises used VE as a measure of long-term incentive during the survey of the status of China’s human resource management in 2006 [18]. In order to incent the staffs to participate the back’s corporate governance, Deutsche Bank’s global share plan was passed by its general meeting of stockholders. Moreover, many listed companies used the stock option plan after 1990 [19]. From above we know that more and more companies have been using VE to incent all their staffs, including OS, in recent years.

3) Some views why OS shouldn’t be incented by VE However, as mentioned above, there are still so many

experts and scholars who don’t agree to incent OS by VE. And their main views are as follows:

a) The value that OS creates is very low compared to the key staffs, which means that OS shouldn’t be incent by VE.

b) OS can be incented by bonus or salary, so there is no need to use VE to incent OS.

c) Compared to the key staffs, less OS leave the companies, which means that companies needn’t incent OS.

d) VEIOS will lower the spiritual effect of the equity incentive, and in order to keep the effect VE needn’t be used to incent OS.

e) VEIOS will increase the product cost, which will weaken the competitiveness of the product, so VEIOS is infeasible.

f) VEIOS will dilute the ownership structure and share proportion, which will affect the benefit of shareholders and senior managements.

g) The thoughts and behaviors of OS will change when VEIOS is put into practice, which will increase the difficulties of the management and control to OS.

II. ANALYSIS OF VEIOS

A. Disproval of Infeasibility of VEIOS 1) Excellent companies will not consider their OS not

creating value for companies. On the contray, they believed OS are the fundamental resources of improving the

companies’ quality and productivity (Tom • Peters, 1982). Besides, according to Wyatt Consulting Firm’s investigations of 698 companies, the number of whose staffs is more than 500, during 1996 and 1997, 52 percent of the investigated companies with the net profit have all incent their staffs by the Employee Stock Ownership Plans (ESOP) [20]. Moreover, in accordance with the empirical analysis mentioned above (Qiao Haishu and Wang Junhua, 2006), the bank’s return on net-assets and earnings per share are positive correlated with the average compensation of OS; meanwhile, the bank’s ratio of non-performing loans is significantly negative correlated with the average compensation of OS [19]. Therefore, OS is very important to corporate’s wealth maximization.

2) Bonus or salary can only incent OS in the short term. Thus, if ther is another company which can give the OS more bonus or salary, OS will generally leave the company and go into the company with high bonus or salary. On the contrary, if VE is used well to incent OS like putting the work years into the appraisal of VEIOS, OS will be incented not only in the short term but also in the long term.

3) The main reason why less OS leave the companies is that OS are always in the bad employment situation, and not leaving the companies is the typical choice in accordance with the lesser of two evils principle. Of course, under such situation companies can use the big stick, even spread the news that some OS will be laid off, to deal with OS [21]. However, once the employment situation becomes good, or OS become stronger, they will determinedly leave the companies for ever.

4) On the one hand, everyone in the companies should be equal from the angle of personality. And if it is not, the construction work of the company culture is blameable. On the other hand, VE also can incent all the staffs differently to keep the spiritual effect of the equity incentive. For example, companies can give 5 percent virtual shares to the senior staffs, 0.5 percent to the skilled staffs and 0.05 percent to OS, which also has different spiritual incentive effect.

5) From the static angle and one-time angle, no matter what models companies use, VEIOS will improve the salary cost. However, as we all know, what companies care most is the net profit rather than just the salary cost. Except adding the salary cost, VEIOS can also lower the supervision cost and the loss of workers’ poor performance. Meanwhile, it will also create more value, which is proved above [19].Therefore, if VE is used very well to incent OS, VEIOS can bring the companies more profit rather than increasing the salary cost or lowering the profit of the companies.

6) VE is not the same as the real equity, and it uses the unreal stock rather than the real one to incent the staffs. So because of its virtuality, the ownership structure won’t be changed. At the same time, as mentioned above, VEIOS will create more value and wealth for companies. Thus, shareholders and senior managers will get more benefit because of their great share proportion of the companies.

7) VEIOS will bring OS a sense of ownership. And at the same time, the interest and companies’ performance are also contacted. Because of this, OS will become more and more zealous to participate in the companies’ production and management, which will make the management and control of OS easier and let shareholder, managers and OS in a long-term win-win situation.

B. Necessity Analysis of VEIOS 1) Human-oriented Choice from “Feeling” Angle.

Enterprises consist of a series of contracts of kinds of factors (Alchian & Aemsetz, 1972). Owners of all the factors are driven by the interest. And the staffs (including the managers and OS) are the most valuable resources in the companies who are implementing companies’ decisions, which will improve companies’ value and wealth [22]. However, nowadays these staffs are waking up to their value, personality and dignity, which they put more and more attention on. So if shareholders and senior managers still don’t attach importance to the staffs’ material and spiritual needs and give them the suitable positions and benefit that should belong to them, the staffs won’t work hard for the companies all the time, which will hurt the interest of shareholders and senior managers. Moreover, in this high-civilized society, shareholders and managers are not just in pursuit of material wealth. At the same time, they also go in for realizing their own value and fulfilling their spiritual needs. Therefore, besides earning good money, shareholders and managers will also be very happy when their staffs are rich and happy. Lastly, companies today should take on more and more social responsibilities, such as caring OS more, which can help OS to improve their living level, strengthen companies’ competitiveness and alleviate the burden of the government and society.

2) Natural Choice from “Reason” Angle Firstly, VE brings more benefit if it is appropriately used,

which is proved above [19].

Secondly, it is very hard for the companies to distinguish who are OS or who are the key staffs. Most of the time, OS and key staffs are relative [5], and they will be changed to each other in the actual work. Therefore, just incenting key staffs without VEIOS is not very good. On the one hand, it will result in the antagonism and negative impact in the inner companies; on the other hand, it can’t be achieved in the actual managing work.

Thirdly, some scholars and enterprisers think that OS create lower value, which becomes the reason of not incenting OS by VE. However, even if this view is right, lower value means lower VE rather than zero VE, which proves that not incenting OS by VE is wrong.

Lastly, in my opinion, the companies’ capital contribution includes the following parts:

a) Capital from the companies’ owners, like fixed assets and intangible assets before the staffs enter into the companies;

b) Labor Contribution from the companies’ owners, like making very important operating decisions;

c) Capital from the staffs, like the education tuition and the training fee before the staffs enter into the companies;

d) Labor contribution from the staffs, like carrying out the operating decisions;

e) Contribution from the government, like public service;

f) Contribution from the nature resource and other resources, like the environment.

According to the Total Factor Value Theory (He Ruxia, 2005), which is that all factors play an role in the process of the companies’ value and wealth creation [23], this paper believes that the above factors can share the distributable residual right of the companies. Therefore, after owners, the government and key staffs take most of the right and benefit of the companies, OS absolutely should enjoy some benefit by VEIOS or some other ways. Otherwise, it is unfair for OS in the cooperation and contract with the owners, senior managers of the companies.

3) Tendency Choice from “Trend” Angle Firstly, because of their number, quality and abilities, OS

will affect the companies’ competitiveness now and in the future, so they are very important to the companies’ survivor and development in the future. Thus, it is of great importance to improve the quality and abilities of OS by training and some other ways. However, the companies can’t achieve this goal only by themselves. On the one hand, the salary of OS is very low comparatively, which will make them be busy with daily trivia rather than with their work all the time, saying nothing of the companies’ training. That’s the main reason why OS are unwilling to participate in the companies’ training and work. On the other hand, because of their poor salary, OS don’t have enough time and energy to spend on their work and the companies’ training, which will generate poorer quality and lower abilities, forming a vicious circle lastly. Therefore, if companies want to improve the quality and abilities of OS, the first thing that should be done is invest OS more. And VE is a good way for this.

Secondly, as mentioned above, more and more companies are using VE to incent their staffs [11]. Under this situation, if the companies still don’t change its incentive model to incent their key staffs and OS, they will definitely fail in future competition.

Lastly, more and more competitive pressure requests companies’ staffs, especially OS at the front-line, pay more attention to their jobs. But more requests to OS means more interest to OS. And if the companies just request their OS to do more work without more payment, the situation can’t be kept for long time. In conclusion, VEIOS is the best unique choice of the companies if they want to develop well now and in the future.

III. SUGGESTIONS OF VEIOS 1) Good Design of VEIOS Combined with Practical

Conditions Each company differs with another one. Thus, fist of all the

companies should investigate and analyze their situation

seriously and carefully to make sure each related aspect clear. On this basis, the companies may design a suitable system and plan of VEIOS combined with companies’ practical conditions, including the companies’ business, quality and abilities of the staffs, the old incentive system and its implementation, and so on. The system and plan should be as easy as possible because they should apply to OS. If they can’t be easily executed, the effect of VEIOS can’t be achieved very well. Besides, before the plan and system are implemented, companies should calculate and analyze it to make sure their feasibility.

2) Great Promoting of VEIOS by Companies’ Culture Syetem

The company culture system is very important not only in its construction but also in the whole process of VEIOS. Thus, the companies should promote VEIOS well by their culture system. Before VEIOS is implemented, OS will have many doubts and questions, which will result in many difficulties to the implementation and effect of VEIOS. So before the implementation, the companies must organize their OS to learn the system and plan of VEIOS. Companies must make sure their staffs understand and strongly support VEIOS. Meanwhile, the companies should pay more attention on the construction of their culture system to ensure a good working atmosphere and promote the implementation of VEISO.

3) Perfect Implemention of VEIOS through Abiding by Regulations

Sometimes, whether a plan or a model is good or not depends on its implementation. If a bad plan is carried out by a good executor, the loss caused by the plan may become lower. On the contrary, if a good plan is carried out by a bad executor, the plan may fail at last. Therefore, no matter what model of VE that companies use to incent OS, to implement the plan of VEIOS is the most important thing. To ensure implement the plan of VEIOS well, the companies should strictly abide by the companies’ rules and regulations as well as the plan and the system of VEIOS.

4) Timely Feedback of VEIOS in Virtue of Regulatory System

First of all, the companies should build up the regulatory system of VEIOS, which can make sure that VEIOS is controlled in all the process. Next the companies should pay close attention to the implementation of VEIOS as well as its supervision at any moment. At the same time, the companies should encourage their staffs to monitor and feed back the implementation of VEIOS. If there is any action that is harmful to VEIOS, the companies should punish related persons timely. On the contrary, the companies should properly award informers in time. In a word, if the companies can use VEIOS very well, more and more wealth will come into the companies, which will also promote national prosperity and social progress.

REFERENCES [1] Li Xinhe, Interest relevant Groups and Corporation Financial Control,

The Study of Finance and Economics, 2001(09), 57-64. [2] Zhang Liangguo, The Pay Design of Ordinary Staff for SDLG Company,

Thesis of Master Degree of Northwest University, Nov. 1st, 2005, 4. [3] Yang Yan, How to Manage the Monthly Performance of Ordinary Staff,

High-Technology & Industrialization, 2006(07), 9. [4] Chen Jun and Wang Shuguang, Thinking of Value Development of

Ordinary Staff, Communication of Finance and Accounting(Financing), 2008(08), 39-40.

[5] Wang Manzhi, Comparative Study on Management between Key Staff and Ordinary Staff, Corporation Research, 2008(04), 39-40.

[6] Gun Xuebin, Application Research on the Ecological Environment in the Human Resources Market Competition, Thesis of Master Degree of Central South University, June 30th, 2005, 57.

[7] Fan Pentao, Zhang Zongyi and Wu Jun, Study on Commercial Bank’s Virtual Equity Incentive based on RAROC, Development Research, 2006(04),106-109.

[8] Hang Zhen, Equity Incentive of SMEs in the Entrepreneurial Stage, Market Modernization, 2007(33), 93-94.

[9] Zhou Yu, Six Suggestions of Long-term Incentive in Non-listed State-owned Enterprises, China Labor, 2007(01), 40-42.

[10] Miao Xinyan, Virtual Equity Incentive of Listed Companies, Human Resources, 2005(11), 60-62.

[11] Deng Na, An Empirical Investigation on the Condition and Efficiency of Executive Ownership Incentives in the Publicly Listed Chinese Stock Companies, Thesis of Master Degree of Zhejiang University, Dec. 1st, 2004, 4-43.

[12] Liu Zhifeng, The Research of the Motivation Mechanism of the Institute of 206 Critical Employee, Thesis of Master Degree of Northwest University, Sept. 1st, 2004, 41-45.

[13] Wei Jixain, How do media companies incent staff by the Equity of Phantom Stock, Young Journalists, 2006(06), 29-30.

[14] Lu Peng, Keep Workers’ Minds by Virtual Stock, Human Resources, 2007(15), 50-53.

[15] Fan Yiyang, Huang Lingyin, Liang Luping, A Discussion on Cashing of EVA virtual equity incentive in the Entrepreneurial Stage, Enterprise Economy, 2008(04), 157-177.

[16] Liu Yinguo, Wu Chengfeng, Employees Participating in Corporate Governance of State-owned Enterprise, Economic Management, 2007(24), 15-19.

[17] Zhao Zhengping, Ye Guocan, Application of dummy-stock management in construction item, Hebei Journal of Industrial Science and Technology, 2009(2), 121-123.

[18] Shen Yan, Status Analysis on China’s Human resource management in 2006, Management @ people, 2007(04), 51-55.

[19] Qiao Haishu, Wang Junhua, Effectiveness of Salary Incentives in Our Joint-Stock Commercial Banks, Finance Forum, 2006(05), 38-44.

[20] Wang Haizhi, Thinking of Managers’ Stock Ownership Plan in China’s State-owned Enterprises, Productivity Research, 2001(04), 88-90.

[21] Shao Jiangping, He Yanding, Theory of Threat incentive and its Application, Human Resource Development of China, 2004(05), 52-53.

[22] Fang Junxiong, Fang Fang, Evolution of Equity Incentive Objects, South China Economy, 2000(07), 40-42.

[23] He Ruxia, A discussion of the Distributable Residual Rights, China Petroleum Enterprise, 2005(8), 74-76.