Broad-based employee share plans are increasingly popular in Hong Kong and Mainland China. Our profile candidate this month, Seth Bohart, Managing Director, Computershare Plan Managers Asia, looks at where this trend may take us in the years ahead.
Thanks for giving us this interview, can we start by discussing the benefits of employee ownership, both for employees and companies?
‘I think when you are looking at the benefits of share plans you need to bear in mind that you have to find the right share plan for the right participants. That will maximise the impact of the share plan, not only for the employees but also for the employers. There is no one share plan that will fit everybody. In this region five to 10 years ago, people were giving options to everybody, but that wasn’t achieving what they set out to achieve.
We look at two different types of share plans. You’ve got the non-contributory type, which includes stock options and restricted share awards – these are typically targeted towards executives. The other type of share plan is what we call the contributory type. This is more of a broad-based plan where everybody – from the tea lady all the way up to the CEO – is eligible to participate. Employees can elect whether they want to participate and then an amount is deducted from their salary on a regular basis – this can be monthly, quarterly, bi-annually, etc. The incentive there will be that the company either provides a matching component, so for every dollar the employee puts in the company matches that, or it gives the employee a discount on the share price.
From a company’s perspective, it is really about retention – bringing in good talent and differentiating yourself. In Mainland China and Hong Kong, companies are seeing a 15–20% staff turnover per year and I think HR departments are looking for something that will help them retain staff. Awarding a cash bonus is big in Hong Kong, but the day after you have given a cash bonus people can walk out the door with everything you have invested in them. With share awards there is a vesting schedule and the benefits are deferred over time.
But share plans are often not only “time based”, they are also “performance based”, meaning that the individual has to achieve performance targets. That helps align their interests with the interests of the company. There is a new trend for large global issuers – Ernst & Young has recently done a local study about this – where the incentive for share plans is not so much retention and attraction but motivation – motivating behaviours by aligning the interests of shareholders. In this region I don’t think we are there yet, I think we are still at the retention phase, but in the next few years it is likely that we will be moving towards that.
The London School of Economics has done a few studies in the last several years, about the benefits of employee share ownership and its effect on employee behaviours. The studies show that employees stay longer, they work longer hours, they take less sick leave, they are more likely to do something about poor performance and they are more interested in the company’s financial success. So when you get employees to see themselves as shareholders, that drives better performance and that is the key benefit for the employer.’
Do you think employee ownership could be the beginnings of a new ownership model – one where the interests of the company, shareholders and employees are better aligned?
‘I think the key thing is that it depends on the company, the industry and it depends on getting the right plan design. I don’t want to make too grandiose a claim for employee ownership, but I think the evidence for the benefits are categorical and irrefutable. And it makes sense logically – it’s human nature.
But the benefits also depend on good communication with your employees. In this region, we have seen companies investing a lot of money in designing and funding share plans and getting legal advice, but failing to communicate with their employees effectively when the plan goes live. That is something we see especially in this region where some of these plans are relatively new. So companies need to engage employees, not only at the enrolment stage but throughout the share plan, making sure that employees are aware of the benefits of the plan.’
Do you know of any examples here in Hong Kong or Mainland China of fully employee-owned firms?
‘There are some big technology companies, Huawei for example, that are heavily employee-owned. Of course, once you’ve gone public, you can’t be fully employee-owned.’
Do you think that employee ownership is particularly appropriate for technology companies?
‘Yes – employee ownership originated with start-up technology firms in Silicon Valley.’
Which is where you originated?
‘Yes, it was. One of the reasons that those firms used equity compensation was that there wasn’t enough cash flow when they were starting out, so instead of giving employees a salary they gave them shares. This meant that if the company did well, everybody shared the benefits. So people were willing to work in technology companies for that type of compensation structure and it worked well for a lot of people, and it worked really well for some people.
So the technology companies were at the forefront of equity compensation, but now we are seeing some of the banks here doing huge plans, as well as insurance companies and restaurants doing some very lucrative general share plans.’
So are share plans really taking off in Hong Kong and Mainland China?
‘Very much so. I made my first trip here in 2005 and since then the business has really grown. Now the reasons for that are a combination of things. As I mentioned, HR people are looking for ways to motivate and reward employees, but another reason is that some of the local companies have acquired overseas companies with existing share plans – an example of that is Lenovo acquiring Motorola and IBM. They therefore acquired employees who had experience of share plans and they wanted to do something similar.
There was also better clarity in the Chinese regulations as well. When we started this business no one knew how to move money in and out of China. The other big grey area was how share plans would be taxed in China. Since then, from 2005 to 2007, both of those areas were clarified. The government brought in specific requirements for employee share plans in China regarding how money could be moved and how the plans would be taxed.
Since those grey areas have been addressed, we have seen the numbers of companies offering share plans increase, and we have also seen the number of participants in those plans increase – they are becoming broader and broader. When we first started, we’d see stock option plans with 20 or so executives, but now we are seeing plans involving 5,000 people.
I think there is also a lot of competitive pressure driving this. So when a market leader starts to offer a very broad plan, everybody else has to think about what they are going to do to stay competitive in the market. Are they going to go on just offering cash?’
What about the risks? What happens, for example, when the share price goes down or, worst case scenario, the company itself goes down? Employees would then lose not only their jobs but also their savings held in company shares?
‘I think that goes back to getting the right plan design. You need to find the right mix of shares and cash. One way to protect against the risks, particularly for low-level staff, is to set a minimum and maximum number of shares employees can purchase. This is so they don’t bury all of their assets in shares. But bear in mind that, if the company is matching a dollar for every dollar the employee contributes, which is the case in Computershare’s plan up to approximately A$3,000, you would have to lose 50% of the share price to start losing money.’
Is Computershare’s share plan popular with employees in Hong Kong and Mainland China?
‘Yes, we have had a very high take-up. We rolled our plan out in Mainland China this year and we had a 90% take-up. Generally, if you get a 20–30% take-up globally, that’s pretty good. But in China the levels of take-up are generally higher, we have been getting a 50–60% take-up with our client plans in Mainland China.’
Why do you think that is?
‘I think it’s a few things. The Chinese are pretty savvy investors. They realise that the plan we are offering has a relatively low risk. I think the other part of it is that this is potentially the first time that they have been able to purchase overseas shares. It is difficult to purchase overseas shares in China.
The demand is so high that we often check with our employees that they really want to buy such a high number of shares. We have minimums and maximums for the number of shares employees can purchase based on their salary, but in China the salary relative to share price can be a little bit skewed. Shares in Baidu right now, for example, are around US$225 each – that’s a significant price for a share relative to the compensation employees are getting.’
The number of shareholders who vote at AGMs in Hong Kong and Mainland China has been decreasing – do you think employee ownership can help reverse that trend?
‘Share plans are unlikely to reverse the general voting trends, but I can guarantee that, on average, a shareholder who is an employee is more likely to vote than a regular retail shareholder. If you are an employee participating in a share plan, you are an employee and a shareholder. From a common sense standpoint, such employees would be much more likely to participate in the voting process – they are closer to the company and have an extra incentive to influence company decisions.’
Do you think that over time employee ownership could change the culture of companies?
‘Giving employees collectively more of a say and getting them more involved in the company could have a big influence on companies, particularly where share plans are broad based.’
Could it also have a wider impact – even changing the way capitalism operates and is perceived?
‘In our consultations with regulators in China they have commented that, in some ways, this is inherently communism – employees get to share in the growth of the company. We have joked that we are teaching communism to the communists, but yes, the nature of share plans is closer to that ideology. Companies in China, particularly state-owned companies, often prefer to give a share award as part of compensation rather than just cash.
The changes we have seen in the last 10 years since we started this business have been remarkable and it is still exponentially accelerating. There are so many changes going on right now. I think if increasing numbers of big Hang Seng Index companies introduce broad-based share plans that will have a big influence on the market.’
What advice would you give to a company secretary of a company that is interested in getting started with this? How should a company secretary be pitching this to directors?
‘To get their attention I think you are going to want to talk about the trends in the market place locally – who is doing share plans and what type of plans they have. You would also want to talk about the increased use of share plans and the reasons for that. I think the board and executive teams are going to want evidence of the things we’ve talked about, in particular how it would impact the company and whether it would be worth the investment.
It is also important to emphasise that there is no cookie-cutter template for how to do a share plan that is going to work for everybody in the same way – it has to be individualised at the company level. You have to ask what you are trying to accomplish – is it better employee motivation, or do you want to be equivalent to competitors in the market? What does your employee population look like? What types of incentives are they currently getting?’
Do you often work with corporate secretaries on this?
‘Yes we do. The corporate secretary is often responsible for the share issuance process and the voting aspects. Share plans touch almost every department, but the departments most involved are usually those of the corporate secretary, HR, finance and legal.’
Could we turn to your own story – as we mentioned earlier, you started your career in Silicon Valley?
‘Yes. I was working in the late 1990s with a technology company in San Francisco. We sold software to companies to manage their own share plans internally and then we started offering outsource services. That company was acquired by Computershare in 2003. I was running the West Coast business, but I wanted to go international. So the plan was for me to do six months in Australia, then another six months in the UK and then come back to the US with global experience.
Within days of arriving in Australia, in December 2004, the Chairman of Computershare and my boss in Australia discussed the opportunities in Hong Kong and Mainland China. I had a background in business development so they sent me up here in January 2005 to take a look at the market. It was my first trip. At that point I would talk to whoever would listen to me – investment bankers, accountants, lawyers, share registry clients. Almost everybody said that it was going to be a difficult market.
But we built up the business. We started in Sydney since share plan expertise didn’t really exist here. We hired a young graduate from the University of Sydney and trained him from the ground up with the promise that if the business took off we would move him to Hong Kong and Mainland China. Now we have about 70 people in Beijing, Shanghai and Hong Kong, and the business is growing rapidly. We have 140–145 clients and very little client turnover. In hindsight, it was a lot to do with good timing. We were really the first to the market for what we do.’