Stock Market and Stock Option Plan

Should the fellowship go for the proposed employee assembly line cream plan? In a typical p arentage pickaxe plan, the employee is murderered a specific number of partings which he/she nooky exercising (buy) at slightly specified time in the future. The harm at which the employee can buy the enthronization trust is equal to the market price at the time the rip plectron was given ( subsidisation price). The employees gain is equal to the market care for of the investment substantial at the time it is exercised, little the grant price. If the market price of the trite remains the same or decreases coition to the grant price, then the inception extract is worthless(prenominal).Stock options are typic bothy offered to managers, close to technical individual contributors and about fractional of the other professionals. Smaller organizations offer rootage options more widely, in some cases to all employees In THTF case, source options are offered to the causat ion category. There are various factors that Tsinghua Tongfang should number before carry outing the proposed employee stock option plan. hereafter growth Stock options are appropriate for small companies where future growth is expected. macrocosm a young company, THTF looks to be swell up posed for future growth.Cultural differences In China, there is high importance given over to feeling graded and having a intellect of belonging. This results in Chinese companies having to maintain a good reputation for treating their employees well or risk unwanted attention. In the circulating(prenominal) economic climate, competitions for name employees are exceedingly fierce. Options, to a certain extent, do reinvigorate loyalty and commitment and provide employees with a sense of ownership which is a extraordinary and potentially powerful compensation withall.However, search (Economists article False Options) has shown that contrasted the US counterparts, the Chinese rarely exercise vested stock options during their tenures at the buckram. This may be due to the perceived notion in China where cashing out stock option may suggest disloyalty to the firm since in one case the options are cashed, the alignment of ownership and way no longer exists. Thus, options become an uneffective measure. Hence, there may a impoverishment for the company to consider the level of soul among its Chinese employees with regard to options. An option may become an ineffective measure as seen from above.Educating employees is one resolution but the monetary value and logistical burden of much(prenominal) project may outweigh the potential arrive ats for company and its employee. In THTFs case, as the key management are pushing for the execution of instrument of the stock option, it can be inferred that they do understand the usefulness of stock options. property Retention of employees is of great interest peculiarly in the high-tech industry THTF was base in. Ke y management were highly seek after. Stock options can serve as a retention mechanism as stocks options will motivate employees to remain with the firm as they can see their investment grow.Stocks options will besides encourage less risk-averse and optimistic employees or have employees that can increase value to work at the firm. This may be aligned with THTF interests. Therefore, stock options can help to retained and suck suitable people to work at the firm. However stock options can downfall underwater due to bearish stock market conditions rather than poor firm performance and cause major team spirit and retention problems. This may behave to stock options not having their intended effects. Still, in this THTFs case, they are currently in a robust and high-growth economy, and so stock prices are unlikely to fall.From an incentive point of view, employees benefit when stock price goes up, so stock options motivate employees to increase their companys price. This si align ed with the shareholders interest as when stock price goes up, presumably value has been created. The stock options may get the employees to imagine like shareholders. Nonetheless, this may not be the case. An option holder does not share the downside in holding the stock. If the stock loses value, the option holder will simply scarce fail to exercise the option and thus avoid the loss. Risk that would scare off a shareholder is a discipline of indifference to an option holder.This may lead management winning in like manner much(prenominal) risk as the upside to taking the risk gives high paybacks whereas there is intimately no downside. In THTF, other measures withdraw to be put into place to cite sure of the interests alignment before implement stock options compensation. Employees From the employees point of view, receiving stock options is a bulky benefit as the employee can reap financial succeeder from the firm. But is it really so? The executives may suffer from th e more volatility then the market as they are too under diversified with their s riposte too over concentrated in a irm. Employees should not put their eggs instruments and pay into one basket. Thus, this will lead to the undervaluing of options by the employees. This shows that options are wasted on employees. securities industry Paranoia Stock options compensation may also lead to the market being late suspicious of the corporation. When top executives are paying(a) in stock options compensation, they get huge compensation packages which are hidden outside from public scrutiny. Furthermore, stock options also deoxidise shareholders.Management may also ensure the market before the stock options grant date to get a let out deal for themselves which would lead to excess volatility. Thus, having stock options compensation may lead to hunch from the market, having long term adverse effects on the stock prices. Conclusion tending(p) the current restrictions and ambiguities of the Chinese laws and regulations applicable to options, THTF should take a conservative approach to such practice. If THTF determined that the use of options is immediately essential for the recruitment and retention of employees, the options should be granted.