Why use equity to motivate employees?

"Equity incentive" has almost become the standard for the recruitment of new economic enterprises. How did the wave of employee stock ownership plan become popular in China? Why set up ESOP equity incentive?

Futu comfort experts believe that for entrepreneurs, there are three benefits to equity incentives for employees:

First of all, enhancing employees' sense of belonging contributes to the stability of personnel. The employee incentive plan takes the future equity value of the enterprise as the incentive target, supplemented by specific requirements related to employee performance such as service years and performance indicators, so as to truly achieve "no pains, no gains", thereby enhancing employees' sense of identity and cohesion with the enterprise, promoting the stability of enterprise personnel, and realizing the long-term interests and value orientation unity between employees and the enterprise driven by the sense of "ownership".

Second, promote healthy competition among employees. By designing personalized employee incentive schemes, different incentive forms and exercise methods or conditions, enterprises can achieve differentiated incentives for different jobs and different job performance levels, and bind employees' performance with corresponding incentive objectives and incentives, fully embodying "more work for more", thus effectively motivating employees to continuously improve their performance and achieving a win-win situation between enterprises and outstanding employees through a fair competition mechanism.

Third, reduce the cash pressure of enterprises (especially early-stage enterprises). Because the equity of an enterprise itself has a certain value, and this value will continue to improve with the development of the enterprise. Enterprises can use incentive tools as cash equivalents to offset part of employees' remuneration/wages. At this time, the exercise price given by enterprises to employees is often extremely low.

Although in accounting treatment, the incentive tool corresponding to equity may be recorded as the cost of the enterprise ("share payment"), which has a certain impact on the data of financial statements, from the perspective of corporate cash flow, it greatly relieves the pressure on enterprises to pay cash rewards to employees.

Start-ups need not worry too much about share-based payment in the case of general losses in the early stage, but once they enter the financial reporting period of listing, they need to listen to the opinions of lawyers and auditors and act cautiously.