Employee stock ownership plan raises concerns

BEIJING -- A new regulation aimed at facilitating the formation of employee stock ownership plans has received mixed reviews from experts.

The draft regulation, which was released Sunday by the China Securities Regulatory Commission, would put emphasis on stock ownership by average employees. China currently has an incentive regulation that favors executive stock ownership.

The draft regulation is open for public comment until Aug 17.

Zhou Ye'an, a professor of economics and corporate finance at Renmin University of China, said the new regulation will certainly help adjust the ownership structure of companies and bring employees extra income through stock ownership.

"However, the biggest defect is that existing shareholders would have to share their stock interests with new ones," Zhou said, referring to the dilution of existing stocks.

Another issue worrying experts is taxation.

In the United States, neither companies nor employees pay taxes on contributions to an ESOP. Stock proceeds are only taxed when an employee retires or leaves the company, according to an ESOP research center in America.

Zhou said that without a preferential tax policy like this, an employee stock ownership plan could "hardly" create any incentive.

CSRC is still negotiating with relevant parties about taxation, said an insider.

However, Guo Tianyong, director of the China Banking Industry Research Center, noted the incentive potential of employee stock plans.

Guo said when employees' personal wealth is "bound together" with the company, they will keep business goals in mind, strive to find more customers and be devoted to cost savings.

But it might not be possible to realize this incentive effect, said Li Kening, director of the International Business School at Beijing Language and Culture University. Li said big companies tend to emphasize participation by senior executives, giving only a small proportion of shares to a large number of employees.

Although the draft rule limits any individual employee to a 1 percent stake in a company through an ESOP, the rule wouldn't prevent a higher concentration of individual stock ownership.

Zhou said the rule doesn't prevent executives from buying more stock on their own outside the plan, meaning top executives could still own most of a company's stock.

China Construction Bank set up an ESOP in July, 2007, with 270,000 qualified employees owning stock valued at 800 million yuan ($125.6 million). China Economic Net criticized the plan as just a salary increase in "disguised" form.

"Such a tiny piece of cake" drags employee ownership down to a "superficial" level that might trigger insider trading problems, Li said.

As for the stipulation in the new regulation that ESOPs must be managed by a third-party asset management company, Li said this will help combat insider trading.

But Zhou of Renmin University said it will be useless if companies and agencies collude with each other.

The draft measures are "too general" and don't make a specific effort to deal with this problem, Zhou added.

"For an ordinary employee like me, it is very hard to believe that a third party will be totally independent and objective," said an anonymous worker from the Bank of China Monday.

Fortunately, the regulation at least provides companies and asset management agencies with a big opportunity to change their old image in business management if they can perform better in safeguarding workers' rights and interests in terms of stock ownership, Zhou said.