The Preference Of Equity Incentive Method

Stock option and restricted stock are the two main methods of equity incentive. Manylisted companies have launched the equity incentive plan since the promulgation of"Management methods of equity incentive listing Corporation (Trial) in December31,2005, and show a significant change in the equity incentive method preference. These firmspreferred stock option in the early years but turned to restricted stock later. Besides, theincentive objects show a significant change too. Companies are reducing the incentive toexecutives but increasing the incentive to core staff. Studies have shown that firms’ growthand corporate governance situation will influence the selection of equity incentive methods,but no one has concerned the relationship between incentive object and the selection ofincentive method. This paper examines the factors that influence the selection of incentivemethod from both sides.Based on the optimal contract theory, companies should choose stock option as themethod to incentive executives as it promotes executives to take risk but rewarded actions.Based on the human capital theory, companies should choose restricted stock to incentivecore staff as it has strict limitations of locking time. Based on the existing researches,high-tech and nation-owned companies should select stock option as the ideal incentivemethods.This paper select all the equity incentive plans published from January1,2006toDecember31,2013as sample, and divided it into3phases:2006-2008,2009-2011and2012-2013. From the result of logistic regression, we find in the first phase, there is nosignificant relationship between incentive method and incentive object, but in the latter twophases, the more proportion of executives in the incentive object, the more probability tochoose restricted stock because restricted stock has lower price and more profits to seek.This result denies optimal contract theory but stands for management power theory. Besides,in the aspect of company characters, in the first phase, the more management stocks beforeincentive, the more probability to choose restricted stock, which is suspected of seeking profits for themselves. But in the last phase, the state-owned companies prefer to choosestock option, which consisted with the demand of firm’s development. this resultdemonstrates that companies are becoming more rational when selecting incentive methodsconcerning the characters of firms.