Long term incentive research report of China’s A-share sci tech innovation board in 2019-2020 From Deloitte Consulting

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The following is the Long term incentive research report of China’s A-share sci tech innovation board in 2019-2020 From Deloitte Consulting recommended by recordtrend.com. And this article belongs to the classification: Deloitte Consulting , Investment & Economy, research report.

Overall review

On March 1, 2019, the rules of the science and technology innovation board were officially implemented, including a series of regulatory policies issued by the CSRC and the Shanghai Stock Exchange. On March 22, 2019, the first batch of enterprises accepted by the science and technology innovation board were released; on June 13, 2019, the science and technology innovation board was officially launched; as of February 29, 2020, 210 enterprises submitted application materials, and 94 registered and took effect. Deloitte Consulting released the first research report on the long-term incentive of the science and technology innovation board in 2019, and then continued to follow-up research. Recently, Deloitte released the “Research Report on long-term incentive of China’s A-share science and technology innovation board in 2019-2020”, focusing on the long-term incentive practice of enterprises in the science and technology innovation board before and after listing, and observing that the enterprises of the science and technology innovation board make full use of the policy innovation breakthrough, and have flexible and diversified plans before and after listing.

Key findings of incentive system

As of February 29, 2020, the Stock Audit System of Shanghai Stock Exchange has received a total of 210 projects (210 enterprises) from the science, technology and innovation board. According to the classification of national strategic emerging industries in 2018, the industrial classification of enterprises applying for science and technology innovation board is as follows:

Long term incentive before listing

More than 70% of the listed companies applying for the science and technology innovation board have implemented or planned to implement long-term incentive plans, and the incentive efforts are relatively large. As of February 29, 2020, 153 of the 210 sample enterprises have disclosed their pre IPO long-term incentive plans (including plans implemented, being implemented or formulated at the time of declaration).

Incentive quota: the average ratio of the total equity incentive amount to the total equity of the company at the time of declaration is 9.5%. Among them, the new generation of information technology industry enterprises accounted for more than 11% of the average, and high-end equipment manufacturing enterprises (10.1%) and biological industry enterprises (8.0%) also accounted for a higher proportion.

Incentive tool 1 – Employee Stock Ownership: a total of 138 enterprises have implemented ESOP before listing. Among them, 63% of the enterprises hold no less than 5% of the total share capital, and the average share holding amount reaches 9.32%.

The share price of ESOP is generally equal to or slightly lower than the fair price of the same period, and the share price is determined according to the company’s development stage, incentive object type and capital operation planning. In order to avoid excessive decentralization of ownership structure and facilitate the management of the plan, the company has generally built employee stock holding platforms, such as limited partnership, limited liability company and asset management Planning, etc.

Incentive tool 2 – Option Plan: among the sample enterprises, 29 enterprises have implemented or plan to implement the option plan; the pre listing right plan usually matches the development stage of the enterprise and the implementation of the listing plan, which is mainly divided into three types: option plan implemented before listing, option transferred to employee stock ownership and cross listing option (not implemented before listing).

Incentive tool 3 – restricted stock: among the sample enterprises, 6 enterprises implement the restricted stock plan; the pre listing restricted stock plan is closely linked with the service period and future performance of employees, and flexible setting of corresponding performance conditions and unlocking arrangement. In terms of incentive price and incentive amount, it usually shows stronger incentive.

In addition to the common equity incentive tools, the research also found that some enterprises explore other feasible long-term cash incentive modes according to their own characteristics and needs.

Long term incentives at the time of listing

About 30% of the executives and core employees of the listed companies on the science and technology innovation board participated in the strategic placement of IPO stocks. 52 of the reporting enterprises clearly indicated that they would arrange senior managers and core employees to participate in the strategic placement of IPO through the establishment of asset management plan. As of February 29, 2020, among the 91 enterprises that have been listed successfully, the senior managers and core employees of 25 enterprises have participated in the strategic placement through the asset management plan.

Incentive quota: the strategic allotment quota allocated by 21 enterprises to senior managers and core employees exceeds 5% of the total IPO quota.

Floating profit: as of April 10, 2020, the average floating profit of the listed enterprises of the science and technology innovation board to arrange senior managers and core employees to participate in strategic placement at the issue price reached 105%, and the earliest batch of enterprises listed on the Board reached 143%.

Long term incentive after listing

As of February 29, 2020, 11 enterprises listed on the science and Technology Innovation Board announced their first equity incentive plans after listing, all of which adopted the second type of restricted stock plan.

Incentive price: most of the 11 companies use IPO price or closing price of the first trading day as the pricing benchmark, or give a certain discount on this benchmark. The actual grant price is about 20% – 70% of the current fair price, and the grant price of 8 enterprises is lower than 50% of the current fair price.

Incentive quota: the first equity incentive amount of 9 enterprises accounts for more than 1% of the current total equity, of which Jingfeng Mingyuan’s incentive quota is as high as 4.58% (about twice the industry average of a shares), and the total number of shares granted by LanChi technology reaches 16.5 million shares; among them, 9 enterprises have reserved grant arrangements, with an average reserved proportion of 17%.

Timing: the granted restricted shares are generally assigned in batches within three to four years after the performance conditions are met. The two enterprises have made different time arrangements for different types of incentive objects.

Incentive scope: the equity incentive coverage of most enterprises is small, and more than half of the enterprises mainly cover the core employees of non executives, or because their executives have participated in the shareholding before listing; some enterprises have a wide coverage, almost all employees.

Grant value: the total value of the first grant of 11 enterprises exceeded 10 million yuan, of which the total value of grants of 3 enterprises exceeded 100 million yuan, the per capita value of 6 enterprises granted to non executives exceeded 500000 yuan, while the per capita value of senior executives was relatively high.

Implementation progress: the interval between the first announcement of the draft of the equity incentive plan and the first announcement of the implementation of the grant is within three months, of which seven enterprises complete the grant within one month after the announcement of the first draft.

Expected value: as of April 10, 2020, the restricted shares granted by 11 enterprises have greatly appreciated, with an average floating profit of about 165% per share.

Other issues related to long-term incentives

With the increasingly strict supervision and the strengthening of investors’ awareness of rights protection, the risks and responsibilities of directors, supervisors and senior managers of listed companies are increasing. According to the governance standards for listed companies (CSRC [2018] No. 29), listed companies can purchase liability insurance for directors with the approval of the general meeting of shareholders. From the perspective of market practice, the application of directors, supervisors and senior management liability insurance in Chinese enterprises listed in the United States is relatively high, while that of a shares (except for the science and technology innovation board) is relatively low. From 2019, the application degree of science and technology innovation board has been improved. In the case of listed companies on the science and technology innovation board, the annual premium for directors, supervisors and senior executives to purchase liability insurance is about 150000-300000 yuan, and the liability limit is 50 million to 150 million yuan.

In the process of removing the red chip structure and transferring to the innovation board, most enterprises adopt various treatment methods to maintain the continuity of incentive and protect the rights and interests of employees for the equity incentive plan that has not been implemented before. According to the survey, among the listed enterprises applying for the science and technology innovation board, 23 enterprises have built the red chip structure, among which 21 enterprises have been dismantled, and corresponding adjustments have been made to the long-term incentive plan implemented during the red chip structure period. The typical treatment methods are as follows:

Before the listing of the science and technology innovation board, the equity incentive plan needs to follow the accounting standards for share payment accounting treatment, which has an impact on the statements. Therefore, it is necessary to consider the valuation of equity incentive tools and the amortization of expenses when planning the incentive plan. It is included in the current profit and loss according to the one-off amortization of shares in the pre IPO period, which is included in the current profit and loss.

Overall outlook

In the long run, China’s science and technology innovation industry has great development potential. In the final analysis, scientific and technological innovation is human’s innovation activity. Excellent talent team and good human resource management are the long-term driving force of scientific and technological innovation enterprises. Scientific and technological innovation enterprises can build a competitive long-term incentive mechanism with the help of policies and capital market, stimulate the enthusiasm and creativity of scientific and technological innovation talents, and promote enterprises’ continuous innovation and income generation.

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